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What is the difference between Discounted Cash Flows (DCF) and Net Present Value (NPV)? When would...

What is the difference between Discounted Cash Flows (DCF) and Net Present Value (NPV)?

When would it be best for me to use DCF?

When would it be best for me to use NPV?

What is the Cash on Cash Return and how is it calculated?

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Answer #1

Basically DCF is a component of NPV.

DCF is the sum of all future cash flows of a given project or business or whatever, discounted to present day. This we call time value of money.

NPV is calculated using the DCF and subtracts the cost of the investment.

So NPV=Initial investment-DCF

If NPV is positive then invest in that project

If NPV is negative then dont invest in that project.

When to use DCF and NPV totally depends on project types, duration, constraints etc etc. We can use IRR also for some projects.

Cash on cash return = annaul cash flow/total cash invested

It is used for projects with long term debt borrowing

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