Discounted Cash Flow
(DCF)

Knowledge Center

   

Converting future earnings to today's money. Explanation Discounted Cash Flow.


Discounted Cash Flow (DCF) is, what amount someone is willing to pay today, in order to receive the anticipated cash flow of future years. The DCF method converts future earnings to today's money. The future cash flows must be recalculated (discounted) to represent their present values. In this way the value of a company or project under consideration as a whole is determined properly.


Discounted Cash Flow calculation

The DCF for an investment is calculated by estimating: the cash that you will have to pay out, and the cash which you expect to receive back. The timeframes that you expect to receive the payments must also be estimated. Each cash transaction must then be recalculated, by subtracting the opportunity cost of capital between now and the moment when you will pay or receive the cash.


DCF example

For example, if inflation is 6%, the value of your money would halve every ±12 years. If you expect that a particular asset will provide you an income of $30.000 in 12 years from now, that income stream would be worth $15.000 today if inflation was 6% for the period. We have now discounted the cash flow of $30.000: it is only worth $15.000 for you at this moment.
 

Why Discounted Cash Flow?

The DCF method is an approach for valuation, whereby projected future cashflows are discounted at an interest rate (also called: Rate of Return), that reflects the perceived amount of risk of the cash flows. In fact, the discount rate reflects two things:

  1. The time value of money. Any investor would prefer to have cash immediately than having to wait. Therefore investors must be compensated by paying for the delay.
  2. A risk premium that represents the extra return which investors demand, because they want compensation for the risk that the cash flow might not materialize.

History of DCF

Discounted Cash Flow was first formally articulated in 1938 in a text by John Burr Williams: 'The Theory of Investment Value'. This was after the market crash of 1929 and before auditing and public accounting were mandated by the SEC. Understandably, as a result of the crash, investors were wary of relying on reported earnings, or in fact any measures of value apart from cash. Throughout the 1980s and 1990s, the value of cash and physical assets gradually became less well correlated with the total value of the company (as determined by the stock market). According to some estimates, tangible assets dropped towards less than one-fifth of the total corporate value. Intangible assets, such as customer relationships, patents, proprietary business models, channels, etc., are the remaining four-fifths.


Book: S. David Young, Stephen F. O'Byrne - EVA and Value-Based Management: A Practical Guide.. -

Book: Aswath Damodaran - Investment Valuation: Tools and Techniques for Determining Value.. -

Book: James R. Hitchner - Financial Valuation: Applications and Models -


Special Interest Group - Discounted Cash Flow


Special Interest Group (111 members)


Forum - Discounted Cash Flow  

In the forum section you will find recent discussions within this knowledge area.


  DCF vs Present Value (1 reactions)
Can someone please explain the difference between the Discou...
 
 
 
 
  DCF Method versus CAPM Model (2 reactions)
What are the differences between discounted cash flow method...
 
 
 
 
  What is Discounted Cash Flow? (DCF) (0 reactions)
DCF shows the future cash inflows at a discounted rate.
...
 
 
 
 
  Advising Finance and Small Business (1 reactions)
If you are a financial advisor to small businesses, please d...
 
 
 
 
  DCF Simple but has Weaknesses! (2 reactions)
The DCF method is the simplest in use, but is a complete ...
 
 
 
 
  DCF for Capital Projects in Condo Association (2 reactions)
QUESTION: Hi, Condo association is planning roof replac...
 
 
 
 

Best Practices - Discounted Cash Flow

In the best practices section you will find the best forum discussions within this knowledge area.



Expert Tips - Discounted Cash Flow

In the expert tips section you will find advices from experts within this knowledge area.



Resources - Discounted Cash Flow

In the Resources section you will find powerpoint presentations, micro-learning videos, articles, news items, etc. within this knowledge area.


Residual Income, EVA and DCF

Valuation...
 

Business Valuation | Company Valuation | Firm Valuation

Business Analysis, Company Analysis | Firm Analysis...
 

Corporate Valuation for Businesses

Corporate Valuation, Book Value, Market Value, Intrinsic Value, Fundamental Value, M&A, VBM, Fundamental Investing...
 

Introduction to Discounted Cash Flow

Initial Understanding of DCF...
 

How to Calculate NPV in MS Excel

Basic Understanding of how to use Excel for calculating NPV...
 
 

News about Discounted Cash


     
 

News about Dcf Discounted


     
 

Videos about Discounted Cash


     
 

Videos about Dcf Discounted


     
 

Presentations about Discounted Cash


     
 

Presentations about Dcf Discounted


     
 

Books about Discounted Cash


     
 

Books about Dcf Discounted


     
 

More about Discounted Cash


     
 

More about Dcf Discounted


     

Compare with Discounted Cash Flow: Net Present Value  |  Payback Period  |  IRR  |  Management Buy-out  |  Economic Margin  |  Relative Value of Growth  |  Total Cost of Ownership  |  CAGR  |  Cost of Equity


Return to Management Hub: Decision-making & Valuation  |  Finance & Investing


More Management Methods, Models and Theory

Special Interest Group Leader

You here? Sign up for free


 


About 12manage | Advertising | Link to us / Cite us | Privacy | Suggestions | Terms of Service
© 2019 12manage - The Executive Fast Track. V15.0 - Last updated: 26-5-2019. All names ™ of their owners.