Discounted Cash Flow Analysis Calculator

Discounted Cash Flow Formula:

\[ DCF = \sum_{t=1}^{n} \frac{CF_t}{(1 + r)^t} \]

Discounted Cash Flow (DCF):

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1. What is Discounted Cash Flow Analysis?

Discounted Cash Flow (DCF) analysis is a 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 using a discount rate.

2. How Does the Calculator Work?

The calculator uses the DCF formula:

\[ DCF = \sum_{t=1}^{n} \frac{CF_t}{(1 + r)^t} \]

Where:

\( CF_t \) — Cash flow at time period t (dollars)
\( r \) — Discount rate (decimal)
\( t \) — Time period

Explanation: The formula sums the present value of each future cash flow, where each cash flow is discounted back to its present value using the discount rate.

3. Importance of DCF Analysis

Details: DCF analysis is fundamental in corporate finance, investment analysis, and valuation. It accounts for the time value of money and provides a quantitative basis for comparing investment opportunities.

4. Using the Calculator

Tips: Enter future cash flows as comma-separated values (e.g., "100,200,300") and the discount rate as a decimal (e.g., 0.05 for 5%). The calculator will sum the present value of all cash flows.

5. Frequently Asked Questions (FAQ)

Q1: What discount rate should I use?
A: The discount rate typically reflects the risk of the cash flows. Common choices include the company's weighted average cost of capital (WACC) or an appropriate hurdle rate.

Q2: How many periods should I include?
A: Include all relevant future cash flows. For growing businesses, you might include an explicit forecast period plus a terminal value.

Q3: What are the limitations of DCF?
A: DCF is sensitive to the accuracy of cash flow projections and the discount rate assumption. It works best when future cash flows are somewhat predictable.

Q4: How does this differ from NPV?
A: NPV is essentially DCF minus the initial investment. This calculator computes the sum of discounted cash flows without subtracting any initial investment.

Q5: Can I use annual percentage rates?
A: Convert percentage rates to decimals (e.g., 5% becomes 0.05) before entering them into the calculator.