What is Discounted Cash Flow?
Discounted Cash Flow is a tool that can be used to determine whether an investment is worth investing in. It can be used when looking to invest in projects, assets, stocks or any investment that produces a cash flow.
The method of calculation is based on projected future cash flows discounted to take into account the time value of money. The time value of money operates under the assumption that £1 today is worth more than £1 in the future if money today can earn interest.
Receiving cash flow as cash after 1 year is not as valuable as getting the money today as it won’t have had the benefit of a year’s interest from investment so needs to be discounted in order to accurately reflect its current day value.
How does discounted cash flow work?
Discounted Cash Flow works by calculating the present value of an investment using discounted projected future cash flows to determine whether the investment is worthwhile.
To use this method, the investor must be able to make reasonably accurate estimates regarding future cash flows and also be able to choose a discount rate that will accurately reflect the time value of money for the period that the investment will be in operation.
The present value of the discounted cash flow calculated will likely be higher or lower than the initial investment therefore providing the investor with a valuable measure regarding the profitability of moving forward with an investment project.
Discounted Cash Flow Calculation
DCF= CF1/(1+r) + CF2/(1+r)2+ CF3/(1+r)3+....CFn/(1+r)n
DCF = Discounted Cash Flow
CFn = Projected cash flow where n=year (1,2...n)
r = Discount rate (e.g. a rate of 5% gives r=0.05)
What are the advantages and disadvantages of discounted cash flow?
Advantages of discounted cash flow:
- Discounted Cash Flow reduces an investment opportunity to a single figure that represents its future value in the present day. This makes it easier to make comparisons between significantly different investments
- If an analyst is confident about the assumptions being made regarding cash flow this method is likely to be more accurate than other methods as it takes into account earnings over the lifetime of a project plus applies a discount rate to make the current day value more realistic
- The techniques are relatively simple to understand compared to other methods
- Advisable to be used as one of many other methods to develop a full understanding of a stocks value
Disadvantages of discounted cash flow:
- If there are low levels of confidence in future cash flow predictions the valuation arrived at will give an inaccurate prediction of the future success of the investment
- The calculation used is very sensitive to changes in estimates, both cash flow and discount rates, which can have a significant effect on the final valuation
- A lot of assumptions have to be made which make it prone to errors when estimating future cash flows and determining an appropriate discount rate
- The discount rate used is fixed throughout the life of the project which may not reflect the future value of today’s money
- Not advisable to make decisions based on this one method alone
Have you thought about Invoice Finance as a cash flow solution for your business?
Invoice finance allows you to release cash quickly from your unpaid invoices.
As your lender, we can release up to 90% of your invoices within 24 hours. On payment of the invoice from your customers, we will then release the final amount minus any fees and charges. There are different types of invoice financing options available to businesses depending on the situation and the level of control they require in collecting unpaid invoices.
We are an invoice financing company who offer a solution whereby payments are collected on your behalf managed by our team of expert credit controllers so you can focus on running your business. Our Confidential Invoice Discounting solution is offered to businesses who want to maintain their own credit control processes, therefore this remains strictly confidential so your customers are unaware of our involvement.
The benefits of invoice finance companies such as Novuna Business cash flow
Want to understand more Cash Flow Finance terms?
Our Cash Flow Resource Hub has been set up to help SME's with cash flow finance advice, tips and resources to help with their cash flow position.
We explore ways you can begin improving your cash flow situation and start getting your business on track to positive cash flow.
Competent staff, slick technology. Would recommend
Halo is one of the smartest bits of tech I have seen & every team is only as good a it's people and I would like to take this time to actually specifically point out Alex Hall & Claire Davies. Alex is an account manager that has continually improved during our time working together and is a real credit to Novuna. Claire has been exceptional from start to finish; meticulous in her work and very patient with us at every temp - an absolute star. It is a shame that the email address went to a generic platform and not each individual. I totally understand why this works better for companies but it did mean that the personal element was lost meaning that starts like Claire will be harder to identify from a customer point of view.
High recommedation for Novuna Business Cashflow.
My company was in need of invoice factoring to assist with the cashflow due to the nature of debtor days with our clients. After looking at a number of options, the right decision was made to work in partnership with Novuna Business Cashflow. Right from setup through sales to customer service, the communication and support has been outstanding. Providing me with all the information I needed regarding new clients coming onto our books. The system they use is so user friendly and the drawdown payments are very efficient in the fast moving world of temporary payroll. This has allowed my company to look at positive growth knowing we are safe financial hands. I would highly recommend Novuna Business Cashflow 10/10.
Set up went well and communication was good.
Syed and Vipul were extremely helpful top class service
Very helpful from the start
Great people made this process very straightforward.
Jemma from Novuna (formally Hitachi) was brilliant. Worked with us throughout the process and succeeded when some others had failed. Carried out the necessary checks with a smile and cheery demeanour, making what would have been a laborious process quite manageable.
Teething problems -Maybe ?
It's still early days so I may alter this review at a later date. However with retentions and concentration limits and other items, were finding were not getting 85% up front, were probably getting nearer 70% Also when a customer pays the remaining allegedly 15% due to us seems not to be credited to become available. For instance a customer paid Â£6918 and a customer paid Â£1300 hence we should see an extra Â£1330 available (15% of both these payments). However availability seemed to go down and not up by Â£1330 !!! Hard to work out where this 15% has actually gone ? I'll re-submit this review when things become clearer.
I found Hitachi true to their world in every aspect of the service they promised. I can't recommend enough.
Excellent Customer care and service.
Excellent customer service from start of initial conversations, right through to finally becoming a customer. The whole team involved are a credit to Hitachi, they were accommodating and informative the whole way along the process. I would highly recommend Hitachi to future clients and business associates. Thanks Alan.
I really enjoyed working with the Hitachi team, professional, helpful and really good people to deal with. They have made what could have been a very difficult experience a pleasure. Very happy to recommend them.
Hitachi made the process of moving factoring facilities painless, bearing in mind we previously had our facility with the same provider since 1997. I cant fault Hitachi's staff and processes and we are delighted with the move.
Staff excellent all together professional
Great service so far
From start to finish the process for transferring our invoice finance to Hitachi has been been brilliant, a smooth transition, great communication our link Person Jonathan Oakes has helped the process go through seamlessly, A great experience so far and a brilliant start to what we hope will be a long term partnership.