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A popular mechanism of measuring quantifying the value of the future cash flow discountedPresent Value of the future Cash Flow LaTeX Math Inline |
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body | --uriencoded--\mbox%7BCF%7D |
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CF}_i =
\frac{\mbox{CF}_1}{(1+r)} + \frac{\mbox{ |
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FF}_2}{(1+r)^2}
+ \frac{\mbox{CF}_3}{(1+r)^3} + ... |
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| \mbox{DCF}_i = \frac{\mbox{CF}_{t_i}}{(1+r)^t} |
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where
The main idea of NPV is that value of cash today is higher than value of cash tomorrow because immediate cash can be invested readily available investment market opportunities and start brining some profit.
NPV dictates that commercial project should not only be just profitable but instead should be on par with or more profitable than easily available investment alternatives.
The corporate investment policy usually dictates that:
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The main idea of DCF is that value of cash today is deemed by the majority of cash owners as higher than value of future cash because it is already in hand and it can be spent by owner or can be invested in readily available low-risk investment market opportunities and assure a certain profit. While future cash may not happen at all or may be lower than returns from readily available low-risk investment.
The corresponding discount of the cash value over time is controlled by Discount Rate (usually denoted as
) which is normally set along with Weighted Average Cost of Capital (WACC).
Investor normally would like to compare different investment opportunities and give early returns more weight and as such comparing DCF rather than FCF.
DCF is used to calculate Net Present Value (NPV) to prioritise investment projects. See also
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Economics / Money / Currency / Cash / Cash Flow
[ Investment / Financial Investment / Cash Discount ]
[ Present Value (PV)][
investment projects with higher NPV should have a financing priority over the projects with lower NPV
See also
Economics
[ Profitability Index (PI) ] [ Net Present Value (NPV) ] [ Internal Rate of Return (IRR) ]