DCF help needed
I'm making a DCF for a debt portfolio (car leases) and the portfolio is funded by debt. My problem is that while during the first 3 years I am getting positive cash the discount is working fine, however, in year 4 I need to pay back the principal payment so my net cash is negative. When I then discount this negative cash it is pretty much halving.. So I am left with a present value loss of half what I will actually pay.
This is then causing my model to say that if the investment has certain parameters it will be loss-making (when I sum all of the 4 years net income) but positive in a present value sense (when I sum all of the 4 years present values).
I understand that getting net profit in as soon as you can is good because you can then use that money to generate returns but this seems wrong.
Just to make sure I understand the problem:
I'm assuming a discount rate of 10%; Year 1 CF $100, Yr2 CF $50, Yr3 CF $20, Yr4 CF -$200
This gives me a nominal total CF of -$30, while the DCF is $10.7, i.e. nominal total is negative and discounted total is positive.
Your question is this investment still worthwhile, even if your nominal total cash flows are negative?
If that's the question, then the answer is the time value of money, i.e. a dollar today is worth more than a dollar tomorrow. In fact, with our discount rate, the dollar today is worth $0.91 in a year's time, given your cost of financing. In other words, in four years' time, when you have that negative cash flow of $200, it is equivalent ("equal in terms of pain") to a $136 loss today. Given that your cumulative discounted cash flows over the next couple years is greater than this, your return on investment on a discounted basis is positive.
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