A popular mechanism of measuring the discounted value of the future cash flow:

(1)	$\begin{array}{l}\displaystyle \mbox{DCF}_i = \frac{\mbox{CF}_{t_i}}{(1+r)^i}\end{array}$

(2)	$\begin{array}{l}\displaystyle \mbox{DCF} = \sum_{i=1}^n \mbox{DCF}_i = \frac{\mbox{CF}_1}{(1+r)} + \frac{\mbox{CF}_2}{(1+r)^2} + \frac{\mbox{CF}_3}{(1+r)^3} + ...\end{array}$

where

$\begin{array}{l}n\end{array}$	total number of accounting periods (usually 1 year)
$\begin{array}{l}i= 0, 1, 2, 3, ...\end{array}$	running number of accounting period
$\begin{array}{l}r\end{array}$	discount rate
$\begin{array}{l}\mbox{DCF}_i\end{array}$
$\begin{array}{l}R_{t_i} = \rm Cash_{in}(t_i) - \rm Cash_{out}(t_i)\end{array}$	the net cash flow at time step $\begin{array}{l}t_i\end{array}$
$\begin{array}{l}R_0 = - \rm Cash_{out}(t=0)\end{array}$	the volume of cash investment at initial time moment $\begin{array}{l}t_0 = 0\end{array}$

Usually $\begin{array}{l}t_i = t \cdot i\end{array}$ , where $\begin{array}{l}t = \rm 1 \, year\end{array}$ and $\begin{array}{l}i = 1,2, 3 ...\end{array}$ is number of years past.

The main idea of NPV is that value of cash today is higher than value of cash tomorrow because immediate cash can be invested readily available investment market opportunities and start brining some profit.

NPV dictates that commercial project should not only be just profitable but instead should be on par with or more profitable than easily available investment alternatives.

The corporate investment policy usually dictates that:

investment projects with negative NPV should be rejected

investment projects with higher NPV should have a financing priority over the projects with lower NPV

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See also

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Discounted Cash Flow = DCF

See also