NVI Technical College Information

Definitions

where

Discounted Cash Flow Analysis (DCF)

Ct = net cash inflow during the period t

DEFINITION of 'Discounted Cash Flow - DCF'

Co = total initial investment costs

A valuation method used to estimate the attractiveness of an investment opportunity.

r = discount rate, and

Discounted cash flow (DCF) analysis uses future free cash flow projections and

t = number of time periods

discounts them (most often using the weighted average cost of capital) to arrive at a

A positive net present value indicates that the projected earnings generated by a

present value, which is used to evaluate the potential for investment. If the value

project or investment (in present dollars) exceeds the anticipated costs (also in

arrived at through DCF analysis is higher than the current cost of the investment, the

present dollars). Generally, an investment with a positive NPV will be a profitable one

opportunity may be a good one.

and one with a negative NPV will result in a net loss. This concept is the basis for the

Net Present Value Rule, which dictates that the only investments that should be

A

made are those with positive NPV values. When the investment in question is an

Calculated as:

acquisition or a merger, one might also use the Discounted Cash Flow (DCF) metric.

Entrepreneurial Profit

The reasoning is based on the economic principle of Entrepreneurial Profit which is

Net Present Value – NPV

an economic theory by Schumpeter, J.A., 1934 (2008), The Theory of Economic

Development: An Inquiry into Profits, Capital, Credit, Interest and the Business Cycle.

Net Present Value (NPV) is the difference between the present value of cash inflows

and the present value of cash outflows. NPV is used in capital budgeting to analyze

The theory indicates that Schumpeter distinguished between two different types of

the profitability of a projected investment or project. The following is the formula for

risk, the first one associated with ‘the technical failure of production’ and ‘the risk of

calculating NPV:

commercial failure’, but he emphasizes that “none of these methods of evening out

economic risks, in principle, creates profit” . Commercial risk is essentially based on

the idea that no entrepreneur would not consider contributing their time to a

business without a minimum profit margin.

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