What is a ‘Discount Rate’? The term discount rate is often used to refer to the interest rate used in discounted cash flow (DCF) analysis to determine the present value of future cash flows. The discount rate in DCF analysis takes into account not just the time value of money, but also the risk or uncertainty of future cash flows; the greater […]

Present value (PV) is the current worth of a future sum of money or stream of cash flows given a specified rate of return. Future cash flows are discounted at the discount rate, and the higher the discount rate, the lower the present value of the future cash flows. Determining the appropriate discount rate is […]

A discounted cash flow (DCF) is a valuation method used to estimate the attractiveness of an investment opportunity. DCF analysis uses future free cash flow projections and discounts them to arrive at a present value estimate, which is used to evaluate the potential for investment. If the value arrived at through DCF analysis is higher than the current cost […]

Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows. NPV is used in capital budgeting to analyse the profitability of a projected investment or project. The following is the formula for calculating NPV: where Ct = net cash inflow during the period t Co = total initial investment costs […]

Trend analysis involves the collection of information from multiple time periods and plotting the information on a horizontal line for further review. The intent of this analysis is to spot actionable patterns in the presented information. In business, trend analysis is typically used in two ways, which are as follows: Revenue and cost analysis. Revenue […]

Residual value is the disposal value of an asset, that is, it represents the amount of value that the owner of an asset can expect to eventually obtain when the asset is disposed of. The key issue with the residual value concept is how to estimate the eventual amount that an owner will obtain from an […]

The classic measure of the profitability of goods and services sold is gross margin, which is revenues minus the cost of goods sold. The cost of goods sold figure is comprised of a mix of variable costs (which vary with sales volume) and fixed costs (which do not vary with sales volume) and you will […]

Value Added Tax (VAT) is levied on the sale of goods or services by UK businesses. VAT is collected on behalf of HM Revenue & Customs by companies. A company pays VAT to HMRC by calculation the amount of VAT charged to customers minus any VAT they have paid on their own purchases. All goods […]

As referred to in the Acid Test Ratio explanation, the Current Ratio is a liquidity ratio that measures a company’s ability to pay short-term and long-term obligations. To gauge this ability, the current ratio considers the total value of assets of the company (both immediately liquid and illiquid) relative to that of the company’s total […]

The acid-test ratio is a strong indicator of whether a firm has sufficient short-term (current) assets to cover its immediate liabilities. This ratio is also commonly known as the quick ratio, and the metric is felt to be more robust than the current ratio, also known as the working capital ratio, as the Acid Test Ratio ignores illiquid […]

Business jargon in easy to understand plain English