1. What is Discounted Cash Flow (DCF)?

Discounted Cash Flow (DCF) is a financial valuation method used to estimate the value of an investment based on its expected future cash flows. The DCF analysis attempts to figure out the value of an investment today, based on projections of how much money it will generate in the future.

2. How Does the DCF Calculator Work?

The calculator uses the DCF formula:

Where:

• \( CF_n \) — Cash flow in period n
• \( r \) — Discount rate (as decimal)
• \( n \) — Period number (time in years)

Explanation: The formula discounts each future cash flow back to its present value by dividing it by (1 + discount rate) raised to the power of the period number.

3. Importance of DCF Analysis

Details: DCF analysis is widely used in investment finance, real estate development, corporate financial management, and valuation. It accounts for the time value of money - the principle that money available now is worth more than the same amount in the future.

4. Using the Calculator

Tips:

• Enter future cash flows as comma-separated values (e.g., 100,200,300)
• Enter discount rate as a percentage (e.g., 10 for 10%)
• The calculator will show the sum of all discounted cash flows
• A detailed breakdown shows each period's discounted value

5. Frequently Asked Questions (FAQ)

Q1: What discount rate should I use?
A: The discount rate depends on the risk of the investment. Common choices include WACC (Weighted Average Cost of Capital), required rate of return, or risk-free rate plus risk premium.

Q2: How many periods should I include?
A: Include all periods where you expect meaningful cash flows. For growing companies, analysts often project 5-10 years and add a terminal value.

Q3: What's the difference between DCF and NPV?
A: NPV (Net Present Value) is essentially DCF minus the initial investment. DCF gives the total present value of future cash flows.

Q4: What are the limitations of DCF?
A: DCF is sensitive to assumptions about growth rates and discount rates. Small changes can lead to large valuation differences. It also assumes cash flows can be accurately predicted.

Q5: How is terminal value handled in DCF?
A: Terminal value accounts for cash flows beyond the projection period. It can be calculated using perpetuity growth or exit multiple methods, but isn't included in this basic calculator.