... for its owners. Under certain situations, using the net present value rule maximises share price and maximises shareholders' wealth. For example, a housing company is considering a proposal to build new block of flat. Required initial investment is £10m. Payoffs are cash flows of £2m in year 1, and £5m each for the next 2 years. Year T =0 T =1 T = 2 Cash flow -10 5 Investors require a 10% return on this type of project. Should we accept this project? One way to calculate the NPV for this project is the Discounted cash flow. Discounted cash flow (DCF) is the process of valuing an investment by discounting in future cash flow. The way to work this out is to find the present value of the future cash flows at the return investors require and subtract the initial outlay. NPV = -10 + 2 + 5 + 5 = £ 2.224m (1.2) (1.2)2 (1.2)3 As I ...

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