Cashflow discounted

Keywords economic model, shareholder s profit, project cashflow, gross revenue, discounted cashflow, opex, capex, technical cost, tax, royalty, oil price, marker crude, capital allowance, discount rate, profitability indicators, net present value, rate of return, screening, ranking, expected monetary value, exploration decision making. 

The project cashflow discussed so far follows a pattern typical of E P projects a number of years of expenditure (giving rise to cash deficits) at the beginning of the project, followed by a series of cash surpluses. The annual cashflows need to be evaluated to incorporate the timing of the cash flows, to account for the effect of the time value of monef. The technique which allows the values of sums of money spent at different times to be consistently compared is called discounting. 

If the reference date is set at the beginning of the year (e.g. 1.1.98) then full year discount factors imply that t is a whole number and that cashflows occur in lump sums at the end of each year. If the cashflow occurs uniformly throughout the year and the reference date is the beginning of the year then mid-year discount factors are more appropriate, in which case the discounting equation would be ... 

The cashflow discussed in Section 13.2 did not take account of the time value of money, and was therefore an undiscounted cashflow. The discounting technique discussed can now be applied to this cashflow to determine the present value of each annual cashflow at a specified reference date. 

The following example generates the discounted cashflow (DCF) of a project using 20% mid-year discount factors. 

Year Cash Surplus ( m) Discount Factor (mid year) Discounted Cashflow ( m)... 

As the discount rate increases then the NPV is reduced. The following diagram shows the cashflow from the previous example (assuming an oil price of 20/bbl and ignoring the effect of inflation) at four different mid-year discount rates (10%, 20%, 25%, 30%). 

This may be more useful if the cashflow items are discounted e.g. 10% NPV... 

It is not normally possible to make a comprehensive assessment of profitabihty with a single number. The shape of the cumulative-cashflow and cumulative-discounted-cash-flow curves both before and after the breakeven point is an impoiTant factor. 

Discounted cashflow (DCF). This method recognizes that 1,000 income in five years time is worth less than 1,000 receivable this year. The use of DCF in appraising two or more competing projects offers two methods of assessment the net present value (NPV) or DCF rate of return. 

Cash flow is the amount of funds available to a company to meet current operating expenses. Cash flow may be expressed on a before- or after-tax basis. After-tax cashflow is defined as the net profit (income) after taxes plus depreciation. It is an integral part of the net present worth (NPW) and discounted cash flow profitability calculations. 

Typically, the cost of chlorine dioxide is estimated to be several times as expensive as using chlorine, although, there appear to be few genuine comparisons available that take into account initial capital costs, discounted cashflows, equipment and raw material maintenance costs, and the overall effectiveness of the two chemistries. 

Discounted cashflow rate of return (DCFRR). This method is called the investors return on investment, internal rate of return, profitability index, interest rate of return, or discounted cashflow. A trial-and-error solution is necessary to calculate the average rate of interest earned on the company s outstanding investment in the project. It can also be considered the maximum interest rate at which funds could be borrowed for investment in the project, with the project breaking even at the end of its expected life. 

It is necessary to use a trial-and-error solution to calculate the discounted cashflow rate of return, because the interest rate must be determined that will make the present value at the startup time of all earnings equal to that of all investments. An example of a typical balance for continuous-income and continuous-interest with uniform annual net income follows. 

Resulting actualized cash flow for a power plant is presented in Fig. 14.1, showing that from the beginning of plant construction to year zero, the CASHFLOW is negative because of construction costs (CC), and from year 1 to plant life time CASHFLOW becomes positive because of the revenues for electricity sale minus operating costs. The CASHFLOW trend depends on operating hours increase from year 1 to year 3, and then actualization with discount rate. 

---