Course Content
Mastering Discounted Cash Flow Analysis with Excel
Mastering Discounted Cash Flow Analysis with Excel
Introduction to the Discounted Cash Flow Valuation Method
Discounted Cash Flow (DCF) is often referred to as an intrinsic valuation method. Unlike methods that rely on market comparisons, DCF focuses on the true economic value of a business based on its expected future performance.
At its core, DCF is a time value of money model: A dollar today is worth more than a dollar tomorrowβand DCF helps quantify exactly how much more.
Key Concept is Time Value of Money
Money loses value over time due to inflation, risk, and opportunity cost. The DCF method corrects for that by "discounting" future cash flows to reflect what they are worth today.
Mathematically, each year's expected cash flow is divided by (1 + discount rate)^n, where n is the year number. The result is a present value (PV) for each cash flow.
- It's forward-looking, capturing potential growth;
- It helps separate short-term market noise from long-term value;
- It provides a neutral, model-based estimateβnot reliant on investor sentiment.
- Forecasting cash flows involves assumptions that must be carefully justified;
- Choosing the right discount rate (typically WACC) is essentialβit must reflect the riskiness of those cash flows.
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