An Understanding of What Discounted Cash Flow (DCF) Is

There are various methods that Investors, traders, financial analysts, entrepreneurs, brokers, and even agents use to assess the value or worth of an investment or business before considering if such type of an investment or business will be profitable or not.

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Most Investors, traders, and financial analysts that deal mostly in the financial markets like crypto, forex, and stock make use of the methods of discounted dividend and discounted cash flow to analyze the share of a company or the worth value of a crypto company. Here in this post, discounted cash flow is what will be looking at.

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Discounted Cash Flow

When it comes to determining the intrinsic value of an asset be it crypto, stock, or any asset you will have to estimate the present value of the asset to know the expected future cash flows that the asset will generate discounted cash flow is a powerful fundamental approach you can use.

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Just as it is called discounted cash flow which is a financial technique that is used by financial analysts, Investors, traders, etc to evaluate the worth of a business, investment, or asset based on the present value of the expected future cashflows.

Just as in this post, where we talked about how money that is received today is worth more important than the same value of money that will be received in the future, is what DCF operates on which makes Investors believe that a dollar some of the money that is received in the future is worth less than a dollar some of the money that is received today because of the time value for money which we learned in this post.

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The Use of Discounted Cash Flow (DCF)

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Discounted Cash Flow is an approach to knowing the worth of an investment or business which means when it comes to anything that has to do with finance and Investment discounted cash flow is needed.

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• Business Valuation
  Discounted Cash Flow is used by Investors to determine the value of a company, business, or asset before investing.

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• Investment Analysis
  Discounted Cash Flow is used by Investors to assess the attractiveness of an asset like bonds, stocks, crypto, real estate investment, and other type of investment opportunities that generate income.

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• Evaluation of Project:
  Businesses and companies use discounted cash flow to evaluate the profitability of Investments or projects that have potential returns.

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• Merger and Acquisitions
  As an investor, a businessman, or a woman you can use discounted cash flow to estimate the fair value of the company you want to acquire or merge with.

How to Calculate Discounted Cash Flow

To calculate discounted cash flow it is advisable to first calculate the free cash flow of an investment, asset, business, or whatever you want to invest in.

However, today we're here to learn about discounted cash flow before looking at the formula for calculating FCF The free Cash flow formula is stated first.

_{FCF = Cash Flow from Business Operations + Interest Expense of the Business – Tax Shield on Interest Expense of the Business – Capital Expenditures (CAPEX).}

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For Discounted Cash Flow (DCF)

_{DCF= FCF1/ (1+r)^1 +FCF2/(1+r)^2+FCFn/(1+r)^n}

Where:

• FCF1 = FCF year 1
• FCF2 = FCF year 2
• FCFn = each additional year
• n = additional year
• r = Discount Rate
• FCF = FCF for a given year

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Conclusion

_{Today we have learned, about discounted cash flow which is an approach to assessing the worth of an investment, asset, or business before investing knowing this approach will save you from investing in a business that isn't profitable. In our next discussion will are going to look do some calculations and analysis. Note, this is not an investment advice post, purely educational documents.}

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