Analysis of the Use of Discounted Cash Flow Technique of Appraisal under a Changing Discounted Rate and Cash Flow Condition

Discounted cash flow analysis is a valuation technique which assists the investor in determining the viability of a proposed investment by estimating the present value of the expected future cash flows using a discount rate. The conventional approach has been the use of fixed discount rate which from the analyses carried out tends to overestimate the asset value. The use of changing discount rate was found to be more efficient in obtaining more reliable present value of the projected investment cash flows. The credibility of the varying discount rate was essentially due to its ability to take into consideration the impacts of tax risk, market risk, liquidity risk and political risk on the overall investment performances which are prevalent in most economies. To this end, a new discounted cash flow analysis model was derived: NPV = 1/ (1 + (r +x))n to introduce the varying discount rate factor which is recommended for long term investments (above five years) and in volatile economies.