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

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 Instructions

and rename this program.

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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

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 Definitions

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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 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 OK
(Ignore time 0 flows) 3

Cancel
Enter the DISCOUNT RATE
(cost of capital) in percent,
i.e. enter 15% as 15 12 %

Enter a guess for the IRR

(Use the DISCOUNT RATE
if you are in doubt) 12 %

Select One
Do the cash flows contain...

An Annuity A Gradient Neither

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 AnnuityInput

Annuity/Gradient Features

Enter the FIRST PERIOD OK

of the annuity or gradient 1

Cancel
Enter the LAST PERIOD
of the annuity or gradient 10

Enter the ANNUAL AMOUNT

of the annuity, or the INTIAL $ 100
AMOUNT of the gradient

Enter the PERIODIC CHANGE

$
in the gradient. Leave blank if an
annuity

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 Chart Escape

Chart Navigator

Select What You Want to Do Next OK

Return to the Chart Input Page
Cancel
Return to the Main Menu

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 BarChart Escape

Chart Navigator

Select What You Want to Do Next OK

Return to the Main Menu
Cancel

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 OutputViewer

DCF Output

Select The Output You Wish to View OK

Table A: Results of DCF Analysis
Cancel
Cash Flow Diagram
Present Value Profile

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 Cash Flow Diagram

$60.0

$40.0

$20.0

$-
0 1 2 3

$(20.0)
Dollars

$(40.0)

$(60.0)

$(80.0)

$(100.0)

$(120.0)
11/19/2017 Analysis for Financial Management, 6th Ed. by Robert C. Higgins Published by Irwin/Mcgraw-Hill
Period
 $(80.0)

$(100.0)

$(120.0)

Period

11/19/2017 Analysis for Financial Management, 6th Ed. by Robert C. Higgins Published by Irwin/Mcgraw-Hill
 CashFlow

CASH FLOWS

Period Cash Flow

0 $ (100.0)
1 $ 20.0
2 $ 40.0
3 $ 50.0

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 CFAnalysis

Table A. Results of Discounted Cash Flow Analysis

Initial Cash Flow ($100.00)

Terminal Cash Flow $50.00
Number of Periods 3
Discount Rate 12.0000%

FIGURES OF MERIT:

Net Present Value (NPV) ($14.67)

Internal Rate of Return (IRR) 4.31%
Profitability Index (PI) 0.85
Equivalent Periodic Annuity ($6.11)
Net Terminal Value (NTV) ($20.60)
Payback Period in Years 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)
11/19/2017 Analysis for Financial Management, 6th Ed. by Robert C. Higgins Published by Irwin/Mcgraw-Hill
Discount Rate (%)
 ($50.0)

($60.0)

($70.0)

Discount Rate (%)

11/19/2017 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 0.00%

(if in doubt try 0)

Enter the discount rate at which to end 75.00%

(if in doubt try 50)

0.00% $10.0
7.50% ($6.5)
15.00% ($19.5)
22.50% ($29.8)
30.00% ($38.2)
37.50% ($45.1)
45.00% ($50.8)
52.50% ($55.6)
60.00% ($59.7)
67.50% ($63.2)
75.00% ($66.2)

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 Sheet4

Yr 0 -130
1 10 10
2 10 20
3 10 30
4 10 40
5 10 50
6 10 60
7 10 70
8 10 80
9 10 90
10 10 100
11 10 110
12 10 120
13 10 130 13

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