Instructions
Instructions for Using DCF DCF is intended as a companion to ANALYSIS FOR FINANCIAL MANAGEMENT, 6th edition, by Robert C. Higgins. Some basic familiarity with Microsoft Excel will be helpful, but not necessary, to use this program. DCF performs a discounted cash flow analysis of user-supplied cash flows. Output consists of six figures of investment merit, including Net Present Value and Internal Rate of Return, a Present Value Profile and a Cash Flow Diagram. DCF can answer most practical, present value problems extending over as many as 360 periods. (360 periods enables you to analyze 30-year, monthly payment mortgages.) Enter Cash Flows Leave these instructions and return to the main menu by pressing the button at the top of this page. At the main menu, select Input Data. A dialog box will appear and you can enter the relevant data. You will then go automatically to the Cash Flows input page. Input your cash flows in the blue areas. Don't worry about formatting, that is done automatically. Perform Calculations When you have entered your cash flows, press the Analyze button and you will return to the main menu. View Results To view the results of the analysis, press the View Output button. You may then select "Table A: Results of DCF Analysis" to view the various figures of invesment merit, or either of two graphs: a cash flow diagram, or a present value profile. (Note: If you are working with more than about 50 cash flows, don't bother making a cash flow diagram. You'll not be able to distinguish one cash flow from another.) To construct the present value profile, you will be asked to provide a range of discount rates over which the profile will be constructed. For any given range, the program calculates the NPV at 11 equally spaced discount rates throughout the range. Printing Output To print copies of either of the graphs, go to the Main Menu and click on the black circular button corresponding to the chart you wish to print. Clear The Clear button on the Main Menu clears all the tables so you can analyze a new set of cash flows. If you want to save your work, use the Save As command in your software and rename this program.
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Instructions
will be helpful,
iscount rates
your software
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Definitions
DEFINITIONS AND SELECTED EXAMPLES Net Present Value = The increase or decrease in wealth created by the cash flows under analysis; the present value of the indicated cash flows discounted at the specified discount rate. Cash flows are assumed to occur at equal time intervals and at the end of the period. Internal Rate of Return = The discount rate that makes the Net Present Value of the given cash flows zero. If the computer does not find an IRR after 20 trials, or if the time 0 cash flow is positive, the IRR in Table A will show an error message. When other figures of merit show strange results or error messages, this usually indicates that the figures are not relevant for the cash flow analyzed. Equivalent Periodic Annuity = The annuity with a present value equal to the Net Present Value of the cash flows at the given discount rate. The life of the annuity equals that of the cash flows. Net Terminal Value = The terminal period cash flow with a present value equal to the Net Present Value of the cash flows at the given discount rate. Payback Period = The number of periods required for the undiscounted cash inflows to equal the original investment. Selected Examples 1. Mary invests $100 today at 11.3% annual interest. What will this investment be worth in 70 years? Ans: Input cash flows as a 70 period, zero-value annuity, with a time 0 cash flow of $100. NTV = $179,746.94 2. Bill wants $130,000 in 19 years to pay for his daughter's education. How much must he invest today at 7.26% annual interest? Ans: Input cash flows as a zero-value annuity from Year 1 to 18; with a time 0 cash flow and a Year 19 cash flow of $130,000.. NPV = $34,326.17 3. Alonzo needs a $90,000 morgage loan. What will his monthly payments be on a 30-year, fixed rate loan at 9 7/8% annual interest? Ans: Input as a 360 period, zero-value annuity with a time 0 cash flow of $90,000 and an interest rate equal to .09875/12 per period. Equivalent Periodic Annuity = $781.51 4. Chun-yu can afford to pay $900 per month in mortgage payments. How much can he borrow on a 25-year, fixed rate loan at an annual interest rate of 8 3/4%? Ans: Input as a 300 period annuity of $900, a time 0 cash flow of 0 and an interest rate of .0875/12. NPV = $109,469.92
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Definitions
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MainMenu
MAIN MENU
Cash Flows PV Profile
Copyright 2000, Irwin/McGraw-Hill.
This computer program is protected by copyright law.
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MainMenu
DCF
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DCFInput
DCF Inputs Enter the number of PERIODs over which the cash flows extend 3 (Ignore time 0 flows) Enter the DISCOUNT RATE (cost of capital) in percent, i.e. enter 15% as 15 Enter a guess for the IRR (Use the DISCOUNT RATE if you are in doubt) Select One Do the cash flows contain... An Annuity A Gradient Neither
OK Cancel %
12
12
%
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AnnuityInput
Annuity/Gradient Features Enter the FIRST PERIOD of the annuity or gradient Enter the LAST PERIOD of the annuity or gradient Enter the ANNUAL AMOUNT of the annuity, or the INTIAL AMOUNT of the gradient Enter the PERIODIC CHANGE in the gradient. Leave blank if an annuity 1 OK Cancel 10
$ 100
$
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Chart Escape
Chart Navigator Select What You Want to Do Next Return to the Chart Input Page Return to the Main Menu OK Cancel
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BarChart Escape
Chart Navigator Select What You Want to Do Next Return to the Main Menu OK Cancel
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OutputViewer
DCF Output Select The Output You Wish to View Table A: Results of DCF Analysis Cash Flow Diagram Present Value Profile OK Cancel
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Cash Flow Diagram
$60.0
$40.0
$20.0
$0 $(20.0) 1 2 3
Dollars
$(40.0)
$(60.0)
$(80.0)
$(100.0)
$(120.0)
Period
8/14/2008
Analysis for Financial Management, 6th Ed. by Robert C. Higgins
Published by Irwin/Mcgraw-Hill
CashFlow
CASH FLOWS Period 0 1 2 3 Cash Flow $ (100.0) $ 20.0 $ 40.0 $ 50.0
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CFAnalysis
Table A. Results of Discounted Cash Flow Analysis
Initial Cash Flow Terminal Cash Flow Number of Periods Discount Rate FIGURES OF MERIT: Net Present Value (NPV) Internal Rate of Return (IRR) Profitability Index (PI) Equivalent Periodic Annuity Net Terminal Value (NTV) Payback Period in Years
($100.00) $50.00 3 12.0000%
($14.67) 4.31% 0.85 ($6.11) ($20.60) 2.80
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Present Value Profile
$20.0
$10.0
$0.0 0.00% 7.50% 15.00% 22.50% 30.00% 37.50% 45.00% 52.50% 60.00% 67.50% 75.00%
($10.0)
Net Present Value
($20.0)
($30.0)
($40.0)
($50.0)
($60.0)
($70.0) Discount Rate (%)
8/14/2008
Analysis for Financial Management, 6th Ed. by Robert C. Higgins
Published by Irwin/Mcgraw-Hill
PVProfile
Present Value Profile Enter the discount rate at which to start (if in doubt try 0) Enter the discount rate at which to end (if in doubt try 50) 0.00%
75.00%
0.00% 7.50% 15.00% 22.50% 30.00% 37.50% 45.00% 52.50% 60.00% 67.50% 75.00%
$10.0 ($6.5) ($19.5) ($29.8) ($38.2) ($45.1) ($50.8) ($55.6) ($59.7) ($63.2) ($66.2)
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Sheet4
Yr 0 1 2 3 4 5 6 7 8 9 10 11 12 13
-130 10 10 10 10 10 10 10 10 10 10 10 10 10
10 20 30 40 50 60 70 80 90 100 110 120 130
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