The Discounted Cash Flows (DCF) is one the techniques that investors use when gauging the attractiveness of an investment opportunity. According to Kruschwitz, Lutz et al. (2006), the method takes into account the Future Free Cash Flows (FFC) and discounts them using the Weighted Average Cost of Capital (WACC) to arrive at the estimated present value. The DCF represents the present value of the cash flows that is expected ( French & Nick, 2013) . The present value is used in the evaluation of the potential of investment that is projected by the venture. DCF is calculated from the following formula.
DCF= CF1/ (1+r)1 + CF2/(1+r)2 + CF3 / (1+r)3 + Terminal value/ (1+r)3
Where the CF is the Cash Flows and r is the WACC.
The summation of the discounted cash flows plus the discounted terminal value will give the DCF of the firm.
Delegate your assignment to our experts and they will do the rest.
To obtain the Net Present Value (NPV), the DCF is deducted from the initial cash outlay. The initial cash outlay is the amount of money that is supposed to be invested in the project. When the NPV is positive, then the project becomes desirable. The NPV shows the net returns that are received from an investment after accounting for the startup costs. When the NPV is positive, then it gives an implication that the venture will yield profit and that the invested money will obtain sufficient net returns. On the other hand, a negative NPV implies that the project will result in losses and that it should be rejected before losing money on it ( Reyck, Bert et al. 2008) . In other words, a positive NPV gives an investor confidence in the project.
Net present value (NPV) = Initial Cash Outlay – DCF
References
De Reyck, B., Degraeve, Z., & Vandenborre, R. (2008). Project options valuation with net present value and decision tree analysis. European Journal of Operational Research , 184 (1), 341-355.
French, N. (2013). The discounted cash flow model for property valuations: quarterly in advance cash flows. Journal of Property Investment & Finance, 31(6), 610-614. Doi: 10.1108/JPIF-05-2013-0030
Kruschwitz, L., & Löffler, A. (2006). Discounted cash flow: a theory of the valuation of firms . John Wiley & Sons
