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What is DCF Valuation?

Discounted Cash Flow (DCF) Valuation is a financial method used to estimate the value of an investment based on its expected future cash flows. These cash flows are adjusted to their present value using a discount rate, typically the company's weighted average cost of capital (WACC). This approach helps determine the intrinsic value of a company or asset.

How to Calculate DCF Valuation

• Forecast Cash Flows: Estimate the company’s future cash flows over a specific period.
• Determine Terminal Value: Calculate the value of cash flows beyond the forecast period.
• Discount Cash Flows: Apply the discount rate to bring future cash flows to present value.

DCF = ∑(CFt / (1+r)^t) + TV / (1+r)^n

Where:

• CFt = Cash Flow at time t
• r = Discount rate
• TV = Terminal Value
• n = Number of periods

Example

Consider a company expected to generate $100,000 annually for the next five years, with a discount rate of 10%. The terminal value at the end of year five is estimated at $500,000.

1. Forecast Cash Flows:

Year 1 to 5: $100,000 each year

2. Terminal Value:

Terminal Value at end of year 5: $500,000

3. Discount Cash Flows:

Present Value of Cash Flows:
100,000 / (1+0.1)^t (calculated for each of 5 years) ≈ 379,079

Present Value of Terminal Value:
500,000 / (1+0.1)^5 ≈ 310,464

4. DCF Valuation:

Total DCF Value: 379,079 + 310,464 ≈ 689,543

Thus, the estimated value of the company based on DCF is approximately $689,543.

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