$45.00 USD
Evaluating future cash flows in this way is a staple methodology when trying to assess the risk and potential value of a given venture.
In this model, the default investment requirement will be the minimum cash position based on the running balance of cash flows.
The inputs are designed to be as simple and easy-to-use as possible. The user literally just has to map their monthly cash flows to each monthly period and enter a discount rate, start month, and # of months the data covers. There is a 'month 0' if needed.
The reason why some like to do an analysis based on monthly cash flows is if the project has fairly irregular cash flows that don't happen in a smooth way over each year i.e. the cash may come out earlier in a given year or vice versa (same for cash coming in irregularly). The timing of those cash flows will result in differing IRR and NPV figures compared to doing a DCF analysis on an annual basis.
The entire point of doing this kind of work is to figure out if a project or venture meets certain risk tolerance levels and the main way that is done is by setting the discount rate. The higher the user sets the discount rate, the lower the net present value will be. A higher discount rate means the cash flows will be valued less, and vice versa. If the user thinks a given set of future cash flows is more risky, the discount rate should be higher, and if the user thinks the cash flows are not too risky, the discount rate should be set lower. Usually, what is low and high is measured relative to risk free rates or a number of public rates that are available on various financial instruments.
Some things you may learn from this:
- The correct logic for discounting cash flows on a monthly basis.
- How to correctly use math to convert monthly rates into annual rates.
- Visualize cumulative value vs. cumulative discounted value.
