Discounted cash flow: Difference between revisions
WikiSysopIG (talk | contribs) Created page with "'''Discounted cash flow''' ('''DCF''') is a business valuation method used to estimate the intrinsic value of an asset, business, project, or investment by calculating the present value of its expected future cash flows. The method is based on the principle that money available today is worth more than the same amount received in the future because of the time value of money. By discounting projected future cash flows using an appropriate discount rate, discounted ca..." |
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The present value of a future cash flow is calculated as: | The present value of a future cash flow is calculated as: | ||
<math> | |||
PV=\frac{FV}{(1+r)^n} | |||
</math> | |||
where: | where: | ||
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The discounted cash flow value of a business or investment is generally obtained by summing the present values of all projected future cash flows, including any terminal value. | The discounted cash flow value of a business or investment is generally obtained by summing the present values of all projected future cash flows, including any terminal value. | ||
For a complete discounted cash flow valuation, the formula is: | |||
<math> | |||
DCF=\sum_{t=1}^{n}\frac{FCF_t}{(1+r)^t}+\frac{TV}{(1+r)^n} | |||
</math> | |||
where: | |||
'''DCF''' = discounted cash flow value; | |||
'''FCF<sub>t</sub>''' = free cash flow in period ''t''; | |||
'''r''' = discount rate (typically the weighted average cost of capital); | |||
'''t''' = time period; | |||
'''n''' = final forecast period; | |||
'''TV''' = terminal value. | |||
The second formula is the one typically used in business valuation, while the first is the basic present value formula from which DCF analysis is derived. | |||
== Components == | == Components == | ||