Difference Between NPV and DCF

NPV vs DCF

NPV and DCF are terms that are related to investments. NPV means Net Present Value and DCF means Discounted Clash Flow. NPV and DCF are closely connected that it is difficult to make out a differentiation between the two. Net Present Value is really a component of Discounted Clash Flow, which makes it more difficult to make out the differences. The NPV is a central tool used in DCF.

Fist of all let us discuss NPV. The NPV represents the present value of cash flow. The Net Present Value is generally used for comparing both the internal and the external investments of a company. The NPV has its major role as it could be difficult comparing different investments, especially when there are different values and different profits payable at various times. The Net Present Value can also be called as the difference between the present values of cash inflow and cash outflow.

In simple words, the Net Present Value compares the value of money today to the value of that money in the future. Investors always look for positive NPVs.

The Discounted Cash Flow helps in making an analysis of an investment and to determine how valuable it would be in the future. The Discounted Cash Flow helps an investor to calculate the returns that would be got for the investments and how long it would take for getting the returns.

DCF is calculated by analyzing the discounted future cash flow. NPV and Internal Rate of Return are the methods used in Discounted Clash Flow. In NPV, the future cash flow is multiplied with a rate.

While dealing with investments, the Discounted Cash Flow method is widely used by investors.

Summary

1. Net Present Value is really a component of Discounted Clash Flow and is the central tool used in DCF.
2. While dealing with investments, the Discounted Cash Flow method is widely used by investors.
3. The NPV represents the present value of cash flow and is generally used for comparing both the internal and the external investments of a company.
4. The Discounted Cash Flow helps an investor to calculate the returns that would be got for the investments and how long it would take for getting the returns.
5. The Net Present Value can also be called as the difference between the present values of cash inflow and cash outflow.

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