DCF technique

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    nomantufail
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    I have a question on discounted cash flow.
    Data for the production of a product.
    Year 1 Feasibilty costs 10,000
    Year 2 capital expenditure 1 million
    Year 4 to year 10 net cash inflow of 40,000
    Launch date of product is at the beginning of year 4 and expected number of products will be 6,000 each year
    Required : calculate cost per product using DCF technique.

    My question is that which point we should take as origin for calculations.(origin here i mean the year which should be deemed year 0)

    Whether it should be beginning of year 4(the date of launch of product). So that we should compound the year 1 and year 2 costs to year 4. And discount cashflows after 4 to year 4.

    Or whether it should be year 0 where we will discount all cashflows to year 0

    Or whether it should be at year 2. The year of capital expenditure.

    Please guide and save my life

    Thanks and regards
    Noman Tufail


    Avatar of johnmoffat
    John Moffat
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    I am a bit puzzled how you are supposed to calculate the cost per unit – it is impossible on the information you have given.

    However, if will not make any difference when you let be time 0 (although it should normally be the date of the first flow).
    The NPV itself will be different depending on the time period (although it would be the same sign (+’ve or -’ve) whichever date you used for time 0.

    For calculating the cost per unit (assuming there was more information in the question) then the date of time 0 will make no difference at all.


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    nomantufail
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    I understood sir. Bundle of thanks. You saved my life.


    Avatar of johnmoffat
    John Moffat
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    You are welcome :-)

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