The Discounted Cash Flow Process

The prime task in project appraisal is to compare the total income from the project over its productive lifetime, with the total investment needed 

The discounted cash flow (DCF) method, to be described here, does enable the making of a fair comparison between inputs and outputs, and provides both an effective rate of return and an easy means of assessing the effects of different approximations. 

The essence of the DCF process is that it does take into account the passage of time during the life of the project. It works by modifying all sums of money, costs or revenues, to give their nominal values at a particular point in time, so that a balance can be struck between the sum of all costs and the sum of all revenues at that point. The method works equally well at any point in time over the project s life, and the first decision to be taken is to select the most meaningful point to use. 

The two balance points in time that are most commonly used are 

There is some sense in selecting the date of the appraisal as a balance point, but this cannot easily allow for the potential delays between conception and start of construction (although it can give a good incentive to reducing delays between idea and implementation for a deserving project). 

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