How to calculate the cash flow discount (DCF)
One of the most used analyzes in business valuation is the cash flow discount. This determines the present value of the money obtained in the future thanks to the investment. In this article we will see how to calculate the cash flow discount (DCF) .You will need to:
- Spreadsheet (Excel)
Obtain the current free cash flow of the company and provide it with annual growth for the next 5 years (the number of years is not fixed, it may vary depending on each investment and the growth may vary depending on the year). To know how free cash flow is calculated, click on "How to calculate the free cash flow". So, if in the first year we have a cash flow of 100 and a growth of 5%, we would have 105.
Obtain the cost of capital or discount rate . If you do not know how to do it press "how to calculate the discount rate (WACC)
To calculate the cash flow discount, you must, for each year, divide the cash flow (with its% applied growth) between (1 + discount rate) raised to the year it touches 1, 2, 3, 4, etc. Once you have them all calculated add up and you will get the cash flow discount (DCF) .DCF = (CF1 / (1 + WACC) ^ 1) + (CF2 / (1 + WACC) ^ 2 + .... .CF = free cash flowWACC = discount rate.