Calculating NPV for future cash inflows

Question

I have a question, where I am calculating the net present value of a project we are considering if it is beneficial or not. The project starts and the sales (cash inflows), don't start until a few years in. ie. there is several years of R&D before inflows are made. For example:

Project start date: Nov 2017, outlay of $55Million

First Sale (cash inflow): July 2019 - $54 Million

When calculating the NPV, is there anything I need to do in between the project start date outlay (Nov 2017), and the first cash inflow (July 2019). Do I need to discount the cashflow to the present, and if so, how?

Answer 1

When calculating the NPV, is there anything I need to do in between the project start date outlay (Nov 2017), and the first cash inflow (July 2019). Do I need to discount the cashflow to the present, and if so, how?

Yes, you need to discount every cash flow to the present time, not just the first one.

When discounting cash flows, the appropriate discount rate needs to represent the opportunity cost of the initial cash outlay. Meaning if you were to use that money for something else, what rate of return would you expect?

You could be safe and assume only a risk-free return (like 2-3%) or use the average rate of return of other investments (e.g. 10-15%). Another common approach is to use your cost of capital if you're raising funds for the project, or would instead have use the funds to pay off existing debt.

Once you find a relevant discount rate, then just discount each cash flow by dividing them by e^rt, where r is the annualized discount rate (e.g. 0.10 for 10%) and t is the decimal number of years between now and the cash flow (e.g. 1.5 for 18 months)