Tricky Topics Deciphered: Discounted cash flow

Our AAT study guide dives into the tricky topic of discounted cashflow within decision making techniques, for our Level 3 and 4 AAT students.

Discounted cashflow is a decision making technique that students often find tricky, but it’s important to understand the theory behind this technique in order to apply it effectively.

Essentially, discounted cash flow is when we review the costs and revenues for a project to see if the project is worth doing. To do this, we can discount the cash inflows by the cost of the capital.

In the downloadable study guide for discounted cash flow below, we consider this technique in the example of buying a printing machine. The capital needed to purchase it is £100,000 but the machine is expected to generate £12,000 in cash inflow over a 5 year period. Dive into the guide to work through this example with our expert.

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Cath Littler is an accountancy learning specialist working with AAT and Mindful Education. .

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