Discounted Cashflow Model

The above model demonstrates the projected cashflows from a mining operation with an estimated life of mine of five years.

The mine is expected to commence production in the second quarter of 2025 and generate a life of mine, post-tax cashflow of AUD$83 million, using an effective tax rate of 30%.

This cashflow is then discounted to a NPV - Net Present Value - of AUD$60 million, using a discount rate of 10%.

This should generate 17.4 cents per share for a company with 347 million shares on issue.    

NPV - Net Present Value
It is generally accepted that NPV is best practice when analysing any investment decision. This is because it considers the time value of money – a dollar today is worth more than a dollar received in the future – due to inflation, risk and liquidity.

The key inputs to the NPV calculation are the cashflows, the timing of the cashflows and the discount rate.

Discount Rate 
The discount rate is usually modelled using WACC  – Weighted Average Cost of Capital – adjusted for inflation, risk and liquidity.

Another method for calculating the discount rate is to use the Cost of Equity. This measure may be considered superior to WACC because it does not consider the cost of debt.

It is worth noting that the lower the discount rate used, the higher the resulting NPV. This specifically relates to the discount rate used in a DFS - Definitive Feasibility Study or a PEA - Preliminary Economic Assessment.