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discounted cash flow


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The method of calculating the net present value of a project by adding the present discounted values of all net cash flows at various future dates. If the net receipts (income less cost) at time t are Rt, and the rate of interest is 100r percent, the present discounted value of net receipts at time t is Rt/(1 + r)t, and the discounted cash flow is the sum of these into the future, given byA project may have an indefinite life, or it may be expected that for

t > t*, Rt = 0

. Some of the Rt may be negative; this will be the case if construction takes time and there is a running-in period before a new project is expected to make profits. There may also be closing-down costs at the end of a project.

Subjects: Social sciencesEconomics


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