Discounted Cash Flow Examples Help

Discounted Cash Flow Examples, Illustrations, Concepts, Sample Help Online

 
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Discounted Cash Flow Examples Concept

Discounted Cash Flow analysis is also one of the measuring tool that calculates the present value of the investment’s future cash flow. It means Discounted Cash Flow analysis helps an investor to determine the expected return on the investments in future. It helps to find out the current fair value of the investments.
Discounted cash flow analysis helps an investor to measure the potential of an investment.

 
The formula for discounted cash flow analysis is

DCF = CF1/(1+r)1 + CF2/(1+r)2 + CF3/(1+r)3 …+ CFn/(1+r)n
Where

CF1 = cash flow in period 1
CF2 = cash flow in period 2
CF3 = cash flow in period 3
CFn = cash flow in period n
r = discount rate

Discounted cash flow analysis depends on three main factors. They are time, expected rate of return and the amount of cash flows in each period. The expected rate of return and the future cash flows is inversely related to each other. Discounted cash flow analysis considers the time value of money.

 

Discounted Cash Flow Examples Explanation

Let’s understand the concept with help of an example.
Example: suppose you are having $100 at present and compounded it at 12.5 % per year so in three years the amount would be equal to:
$100 X (1 + 0.125)3 = $142

Discounted cash flow equation helps translate future cash flows that an investor is likely to receive from an investment into their present value. The amount depends upon the rate of return it is compounded.

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Summary