FTTH Business Guide - AWT.be

Discount Rate 10%
YEAR
1 2 3 4 5 6 7
CASH FLOWS -10,000 2,000 2,500 2,500 3,000 3,000 3,500
CALCULATION -10,000/
(1+10%) 0
DISCOUNTED
CASH FLOW
2,000/
(1+10%) 1
2,500/
(1+10%) 2
2,500/
(1+10%) 3
3,000/
(1+10%) 4
3,000/
(1+10%) 5
3,500/
(1+10%) 6
-10,000 1,818 2,066 1,878 2,049 1,863 1,976
CUMULATIVE DCF -10,000 -8,182 -6,116 -4,237 -2,188 -326 1,650
The discounted cash flow (DCF) line shows the values adjusted with the given
discount rate of 10%. As with payback, we can look at the cumulative total of the
discounted cash flows. In the table above, the cumulative total only goes positive
in year 7 – as opposed to year 5 using straight payback.
This discounted payback is superior to the straight payback method because it
reflects the returns that could be obtained “risk free” as well as a risk premium –
the extra that makes it worthwhile doing the project in the face of the fact it may
fail to deliver the desired results. However, discounted payback still ignores cash
flows after the end of the payback period.
Net present value
The discounted cash flows themselves are the basis for another calculation that is
very commonly used and is more useful – net present value or NPV. The NPV of a
series of cash flows is a single number calculated using a given discount rate on a
set of cash flows. It is simply the addition of all the discounted cash flows for a
project. In the example above, it is very easy to create the NPV as a final step.
Discount Rate 10%
YEAR
1 2 3 4 5 6 7
CASH FLOWS -10,000 2,000 2,500 2,500 3,000 3,000 3,500
CALCULATION
DISCOUNTED
CASH FLOW
-10,000/
(1+10%) 0
2,000/
(1+10%) 1
2,500/
(1+10%) 2
2,500/
(1+10%) 3
3,000/
(1+10%) 4
3,000/
(1+10%) 5
3,500/
(1+10%) 6
-10,000 1,818 2,066 1,878 2,049 1,863 1,976
NPV 1,650
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