Discounted cash flow techniques - part 2

In this lesson

1. 0:00 Present value calculation fundamentals
2. 1:57 Time value of money in investment projects
3. 3:18 Understanding discount rates and cost of capital
4. 4:34 NPV calculation worked example
5. 7:55 Interpreting positive NPV results

About this lesson

You'll start by mastering the discount factor calculation, which converts future cash flows into today's terms using the formula 1 + R to the power of negative N. The lesson walks you through a practical four-year investment example, showing you how to discount each year's cash inflows and compare them against the initial investment to reach a final NPV figure. Understanding this technique is essential because it factors in the time value of money and the business's cost of capital, giving you a thorough analysis of investment decisions. The key insight is straightforward: a positive NPV means the project returns more than the business's required rate of return, making it a good investment that increases shareholder value. By the end of this video, you'll be confident applying NPV to exam questions and real investment scenarios, knowing exactly when and how to use discount tables or calculate factors yourself.

Duration: 9m