Net Present Value Method - DCF Technique
The method discounts outflows and inflows and ascertains the total present value via deducting discounted outflows from discounted inflows to get net present cash inflows such is the present value method will include selection of rate acceptable to the management or equivalent with the cost of finance and this will be utilized to discount outflows and inflows and net present value will be equivalent to the present value of inflow minus present value of outflow. If NPV is negative you do not invest, if net present value is positive you invest.
P_{v}(inflow) - P_{v}(outflows) = NPV
Note
Initial outflow is at time zero and their value is their real present value. By this method, an investor can ascertain the viability of an investment with discounting outflows. During this case, a venture will be viable whether it has the lowest outflows.
NPV = [A_{1 }/ (1+K)^{1} + A_{2} / (1+K)^{2} + A_{3} / (1+K)^{3} + .... A^{N} / (1+K)^{N}] - C
Whereas: A = annual inflow
K = Cost of finance
C = Cost of investment
N = Number of years