Discounted Cash Flow Formula Calculator

Discounted Cash Flow Formula:

\[ DCF = \frac{CF_1}{(1+r)^1} + \frac{CF_2}{(1+r)^2} + \cdots + \frac{CF_n}{(1+r)^n} \]

Discounted Cash Flow (DCF):

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1. What is Discounted Cash Flow?

Discounted Cash Flow (DCF) is a financial valuation method used to estimate the value of an investment based on its expected future cash flows, adjusted for the time value of money. It helps determine the present value of expected future cash flows.

2. How Does the Calculator Work?

The calculator uses the DCF formula:

\[ DCF = \frac{CF_1}{(1+r)^1} + \frac{CF_2}{(1+r)^2} + \cdots + \frac{CF_n}{(1+r)^n} \]

Where:

\( CF \) — Cash flow for each period (USD)
\( r \) — Discount rate (%)
\( n \) — Period number

Explanation: The formula discounts each future cash flow back to its present value, accounting for the time value of money. Cash flows further in the future are discounted more heavily.

3. Importance of DCF Calculation

Details: DCF analysis is fundamental in investment appraisal, business valuation, and financial decision-making. It helps compare investment opportunities and assess their potential returns.

4. Using the Calculator

Tips: Enter future cash flows as comma-separated values (e.g., "100,200,300"), the discount rate as a percentage (e.g., 10 for 10%). All values must be valid (cash flows as numbers, discount rate ≥ 0).

5. Frequently Asked Questions (FAQ)

Q1: What discount rate should I use?
A: The discount rate typically reflects the risk of the investment. Common choices include WACC, required rate of return, or risk-free rate plus risk premium.

Q2: How many periods should I include?
A: Include all relevant future cash flows. For growing businesses, you might include a terminal value for cash flows beyond your projection period.

Q3: What's the difference between DCF and NPV?
A: NPV is essentially DCF minus the initial investment. DCF gives the present value of future cash flows, while NPV gives the net value after considering the investment cost.

Q4: What are the limitations of DCF?
A: DCF relies on accurate cash flow projections and appropriate discount rates. It can be sensitive to these inputs, and small changes can significantly affect the valuation.

Q5: Can DCF be used for any investment?
A: DCF works best for investments with predictable cash flows. For assets with highly uncertain or irregular cash flows, other valuation methods might be more appropriate.