Discounted cash flow (DCF) is a method used to estimate the value of an investment based on future cash flow. The DCF formula allows you to determine the value of a company today, based on how much money it will likely generate at a future date.

To do this, DCF finds the present value of future cash flows using a discount rate. Once you have the PV it can then be used to evaluate the investment to see whether it is a wise decision.

FAQs

1. What is discounted cash flow?

Discounted cash flow (DCF) is a method used to estimate the value of an investment based on future cash flow. The DCF formula allows you to determine the value of a company today, based on how much money it will likely generate at a future date.

2. How do you calculate discounted cash flows?

The formula for DCF is:
DCF = CF1 / 1 + r1 + CF2 / 1 + r2 + CFn / 1 + rn
Where,
CF = Cash Flow in year
r= Discount Rate
n= Number of Periods

3. Which cash flow is used in DCF?

Discounted cash flow (DCF) calculates the value of a company based on future cash flows; therefore, all future cash flows must be taken into consideration.

4. Is discounted cash flow the same as Net Present Value?

Net Present Value (NPV) calculates the value of the current cash flows the same as DCF; however, NPV goes further by taking inflation into consideration.

5.  Is it called discounted cash flow?

The concept behind discounted cash flow is to determine the present value of future cash flows. This calculates how much something is worth right now, rather than looking at its future value.

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