The calculation of the present value of discounted cash flow method
In financial practice, there is a need to estimate future cash flows associated with ownership of certain assets. This need can be realized by calculating the present value of future revenues. It uses the method of discounting, that is, to bring the amount of money coming period to date.
The discount rate - the interest rate applicable to future income and takes into account the risks and uncertainties related to the time factor.
At the discount rate affects the period of reduction. The later received money, the higher the discount applied to them. The lower the risk, the lower the discount rate and vice versa. It should take into account such factors as interest rates on the market. According to their growth and rising interest rates.
Factor is called the present value, or discount rate. The value of this index for each period and bringing the discount value is determined using financial tables.
Discount rate inverse ratio increase. In these formulas n also means the number of years, ah - an interest rate or bank interest.
This method is used if you want to choose the most effective investment project with several options with the same periods of implementation and costs, but various risk factors, or to study the efficiency of investment in a project.