Cash Flow (Investment Appraisal)
7-4 Cash Flow (Investment Appraisal)
This calculator uses the discounted cash flow (DCF) method to perform investment appraisal by totalling cash flow for a fixed period. This calculator can perform the following four types of investment appraisal.
•Net present value (NPV)
•Net future value (NFV)
•Internal rate of return (IRR)
•Payback period* (PBP)
*The payback period (PBP) can also be called the “discounted payback period” (DPP). When the annual interest rate (I%) is zero, the PBP is called the “simple payback period” (SPP).
A cash flow diagram like the one shown below helps to visualize the movement of funds.
CF2 CF3 CF4 CF5 CF6 CF7
CF1
CF0
With this graph, the initial investment amount is represented by CF0. The cash flow one year later is shown by CF1, two years later by CF2, and so on.
Investment appraisal can be used to clearly determine whether an investment is realizing profits that were originally targeted.
u NPV | CF2 |
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NPV = CF0 + | CF1 | + | + | CF3 | + … + | CFn |
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(1+ i) | (1+ i)2 | (1+ i)3 | (1+ i)n | 100 | |||||||
n: natural number up to 254 |
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uNFV
NFV = NPV ⋅ (1 + i )n
uIRR
0 = CF0 + | CF1 | + | CF2 |
| + | CF3 | + … + | CFn |
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(1+ i) (1+ i)2 | (1+ i)3 | (1+ i)n | |||||||
In this formula, NPV = 0, and the value of IRR is equivalent to i ⋅ 100. It should be noted, however, that minute fractional values tend to accumulate during the subsequent calculations performed automatically by the calculator, so NPV never actually reaches exactly zero. IRR becomes more accurate the closer that NPV approaches to zero.
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