our main task in this lesson is to
discount cash flows we’ve obtained earlier why is this necessary well this
is the basis for obtaining the present value of the project and deciding
whether to go through with it comparing it with other investment alternatives
the company might have perfect we need three things to perform this exercise
the project’s cash flows we obtained earlier it’s terminal value and the
weighted average cost of capital calculated in our previous video all of
these inputs are easily copied to this sheet please note that the residual
value you see here is net of the outstanding loan in year 10 so all of
these values are ready to be discounted do you remember how to do that
the cash flow obtained in a given year is divided by 1 plus the discount rate
which is the weighted average cost of capital in our case raised to the power
of the number of years we are from the future so the first cash flow will be
discounted by 1 plus WAC ^ 1 the second cash flow by 1 plus WAC ^ 2 and so on to
obtain the present value of the project’s residual value we’ll discount
by 1 plus WAC ^ 10 as the residual value shows us the project’s worth at the end
of the 10th year perfect now that we’ve discounted all future cash flows and
obtained their present value we are ready to apply several methods which
will give us an indication whether the project makes sense from a financial
perspective stay tuned for our next lesson where we’ll apply the NPV and IRR
techniques and will also perform sensitivity analysis