If you are brand new to finance, one thing that will come up is a Discounted Cash Flow Analysis (DCF) and this has been around for quite a long time, for good reason, it works!
So, you may be wondering if it makes sense to discount future negative cash flows. For example, if you have monthly cash flows of -40,000 , -25,000 , -5,000 , 150,000.
What is the Net Present Value of that? Well, the answer is that you CAN discount future negative cash flows just like future positive cash flows. so you assign the period number to each cash flow such as 0 for -40,000 , 1 for -25,000 , 2 for -5,000 and 3 for 150,000 and you would do the same for all cash flows you are trying to discount back to a present value.
The negative future cash flows are essentially worth less negative value at present just like positive cash flows are worth less at present. This is like saying that having to pay someone $10 in two years is only like having to pay them some amount less today, so it will still reduce your total net present value, but not as much depending on how far out in time the negative cash flow happens.
In the case above, you can plug the numbers into an Excel template for DCF Analysis or a Google sheet and run a simple calculation: (CF in period) / (1+discount rate)^(period number) and applying that to each number above would give the following present value at a 10% discount rate for each cash flow:
-40,000 -22,727 -4,132 112,697
and NPV is:
45,837.72
- DCF Analysis (monthly periods)
- DCF Analysis Sensitivity Analysis (up to 24 NPV outputs) per 4 cash flow scenarios and 6 discount rates (cool visuals)
- Gordon Growth valuation model - similar to a dividend discount model
