A STUPID MAGIC OF DISCOUNTED CASH FLOW (REAL CASH PROFIT): THE

PV
PV facror at
12% return DCF (BxC) Cum- facror
Year CF Year CF
DCF at 12%
(1/1.12^*) return

Year-0 -3500 1.000 -3500 Year-0 -3500 1.000

Year-1 900 0.893 804 804 Year-1 900 0.893
Year-2 900 0.797 717 1521 Year-2 900 0.797
Year-3 900 0.712 641 2162 Year-3 900 0.712
Year-4 900 0.636 572 2734 Year-4 900 0.636
Year-5 900 0.567 511 3244 Year-5 900 0.567
X 3500
Year-6 900 0.507 456 3700 Year-6 900 0.507
Year-7 900 0.452 407 4107 Year-7 900 0.452
Year-8 900 0.404 363 4471 Year-8 900 0.404
Inflow 4471 Inflow
NPV 971 NPV =
Discounted Pay Back period (X) Alternatively:
(X-5)/(6-5) = (3500-3244)/(3700-3244) PV of Re1. annuity for 8 years at 12%
X= 5.56 Years = 5y 6m 18d =1/0.12-(1/(0.12*(1+0.12)^8)) =
PV of Rs. 900 annuity for 8 years at 12%
Return on Investment (ROI) = Rs.900 x ???? =
Investment = ???? NPV = (Rs.???? - Rs.????) =
Average annual profit/cashflow ????
ROI % ????
Average Investment ????
ROI % (another measure) ????
Manageria
Is life beyond pay back period important
What rate the management considers?
How do they decide the rate?
Which Criteria is Important; ROI or PBP
 EAL CASH PROFIT): THE BASICS OF CAPITAL BUDGETING

PV
facror
DCF Year CF at DCF
19.55%
return

-3500 Year-0 -3500 1.0000 -3500

804 Year-1 900 0.8365 753
717 Year-2 900 0.6997 630
641 Year-3 900 0.5853 527
572 Year-4 900 0.4896 441
511 Year-5 900 0.4095 369
456 Year-6 900 0.3425 308
407 Year-7 900 0.2865 258
363 Year-8 900 0.2397 216
4471 IRR = 19.55% Inflow 3500
971 NPV = 0
Applying Excel formula:
ity for 8 years at 12% IRR = ????
2*(1+0.12)^8)) = 4.9676
nuity for 8 years at 12% ₹971
4471
Rs.????) = 971
0.5614035088
Notes: Greater NPV is better for comparing
Faster return is preferred

Managerial Questions
y back period important?
management considers?
cide the rate?
s Important; ROI or PBP or NPV or IRR?