3.3  Discounted cash flows

The expected cash flows of the Reference Project are discounted to give a single Net Present Cost (NPC). This allows a comparison to be made between a PSC and private sector bids (quantitative assessment) on a single cost basis. Sensitivity analysis should be performed to determine the impact on the PSC of changes in key assumptions and cash flows as outlined in Section 6.6.

The two components of the discounted cash flow model are:

•  periodic estimates, incorporating cash flows from the Raw PSC, Competitive Neutrality, Transferred Risk and Retained Risk estimates; and

•  the discount rate.

This document provides guidance on the creation of the financial model to incorporate both of the above factors. However, the methodology to derive an appropriate PSC discount rate is provided in Discount Rate Methodology Guidance.