1. What is DCF?

Discounted Cash Flow (DCF) is a valuation method used to estimate the value of an investment based on its expected future cash flows, adjusted for the time value of money.

2. How Does the Calculator Work?

The calculator uses the DCF formula:

Where:

• \( C_t \) — Cash flow at time t (dollars)
• \( r \) — Discount rate (%)
• \( t \) — Time period (years)

Explanation: The formula discounts each future cash flow back to its present value and sums them all.

3. Importance of DCF Calculation

Details: DCF analysis helps investors and analysts determine the fair value of investments, projects, or companies by considering the time value of money.

4. Using the Calculator

Tips: Enter cash flows as comma-separated values (e.g., 100,200,300 for three years of cash flows) and the discount rate as a percentage. All values must be valid (cash flows > 0, discount rate ≥ 0).

5. Frequently Asked Questions (FAQ)

Q1: What discount rate should I use?
A: Typically the weighted average cost of capital (WACC) or an appropriate hurdle rate that reflects the investment's risk.

Q2: How many years should I include?
A: Typically 5-10 years for business valuation, or until cash flows stabilize. Include a terminal value for perpetual cash flows.

Q3: What are the limitations of DCF?
A: DCF is sensitive to assumptions about growth rates and discount rates. Small changes can significantly affect the valuation.

Q4: Should I use nominal or real cash flows?
A: Be consistent - use nominal cash flows with nominal discount rates, or real cash flows with real discount rates.

Q5: How does DCF compare to other valuation methods?
A: DCF is more comprehensive than multiples-based methods but requires more assumptions. Often used alongside other methods.