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A popular mechanism of measuring quantifying the discounted value of the future cash flowPresent Value of the future Cash Flow | LaTeX Math Inline |
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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 DCF is that value value of cash today is deemed by the majority of cash owners as higher than value of cash tomorrow because immediate cash 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 corresponding discount of the cash value over time is controlled by discount rate which 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 with account of of how early money return and in what amount and give early returns more weight and as such comparing DCF rather than FCF.
DCF is normally 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)][ Profitability Index (PI) ] [ Net Present Value (NPV) ] [ Internal Rate of Return (IRR) ]
