The only difference is that the initial investment is not deducted in DCF. ![]() The formula is very similar to the calculation of net present value (NPV), which sums up the present value of each future cash flow. The CF n value should include both the estimated cash flow of that period and the terminal value. After forecasting the future cash flows and determining the discount rate, DCF can be calculated through the formula below: Calculation of Discounted Cash Flow (DCF)ĭCF analysis takes into consideration the time value of money in a compounding setting. If a project is financed through both debt and equity, the weighted-average cost of capital (WACC) approach can apply. The cost of capital is usually used as the discount rate, which can be very different for different projects or investments. Then, you need to determine the appropriate rate to discount the cash flows to a present value. ![]() A future cash flow might be negative if additional investment is required for that period. The period of estimation can be your investment horizon. The first step in conducting a DCF analysis is to estimate the future cash flows for a specific time period, as well as the terminal value of the investment. If the DCF is lower than the present cost, investors should rather hold the cash. The higher the DCF, the greater return the investment generates. If the DCF is greater than the present cost, the investment is profitable. The DCF is often compared with the initial investment. ![]() It can be applied to any projects or investments that are expected to generate future cash flows.
0 Comments
Leave a Reply. |
AuthorWrite something about yourself. No need to be fancy, just an overview. ArchivesCategories |