Investment DictionaryDiscounted Cash Flow
Discounted cash flow (DCF) is forecasted net cash flow of the company or other asset that is recalculated (discounted) to its current value. Discounted cash flow is important for investment assessing and mostly is known by DCF valuation method.
The money now are worth more than the same amount of money in the future, that is why they have to be discounted to the current value. The difference of money now and in the future depends on discount rate, which depends on risk free interest rate and risk premium.
Discounted cash flow is very important in corporate finance because every future projection has to be made in discounted mode. It is necessary to understand that future projects have to be valued at the point of time since when first investments are made.
Discounted cash flow is very important in corporate finance because every future projection has to be made in discounted mode. It is necessary to understand that future projects have to be valued at the point of time since when first investments are made.
The easiest way to calculate discounted cash flow is to use Excel’s NPV (Net Present Value) function. To do that you have to know the discount rate (if don’t know how to calculate it, read about WACC) and net cash flow of the future. Net cash flow is equal to all positive cash flow (income) less negative cash flow (investments and expenses) for every year.
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