Scientific Definition O The Most Important Financial Discount Ratios 2/4

Current Net Value Standard


It is one of the standards that depend upon and adopt the Discounting method to neutralize the time factor on the cash unit purchasing power, the change in the individual consumption behavior, legal and legislative amendments and the general atmosphere of the existing economic development.


Definition of the Current Net Value Standard

The Current Net Value Standard is defined as follows:
“The net cash flow generated by the project during its useful life

at a selected and calculated discounting rate, according to certain limitations and assumptions related to the banking interest indicators, profitability of the alternative opportunity of each cash inflows and cash outflows.



The current net value standard is worked out by this equation:

Current Net Value = Current Value of Inflows – Current Value of Outflows


At a suitable discounting rate (15% is approved as discounting rate in the United Arab Emirates as of the Fiscal Year 2005 and until date. There is a tendency to raise it to 20% due to the changes,banking conditions for providing facilities and guarantees and the increase of loans rate on such facilities).

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Scientific Definition O The Most Important Financial Discount Ratios 1/4

Internal Rate of Return (IRR):

To be able to exactly define the Internal Rate of Return we have

to consider the calculation mechanism, monitor and identify its figures source. Therefore we herein below would review the method of calculating the Internal Return Rate:


1- Cash Flow Statements:

Cash Flow Statements refer to the three well-known statements:
• Cash Out Flow Statement:
• Cash Inflow Statement:
• Net Cash Flow Statement:


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2- How the Researchers though of creating the IRR Indicator:
From the net cash flow statement we would realize that negative values always appear in the first year and may reach the second and third years. Then the positive values shall sometimes appear as negative values in the middle years and referring thisto the cost of replacement and renovation of the depreciated assets. Anyway the researchers thought and searched for a method to neutralize the time impact on the value of money as the time passes or so called the time value of money. This is attributed in the first place (due to accumulative experiences) to the fact that the useful life of some projects shall be decided in time-frames between five (service projects) and Twenty Five Years and could be more as in the gigantic industrial projects such as Steel Industry. So, it is not possible to predict the value
of money estimated at the date of the project construction with its value during and/or at the end of the useful life.

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