Discounted Cash Flow (DCF) Valuation, commonly known as the DCF Valuation Model, is a process used by enterprises and businesses to determine the intrinsic worth of their future free cash flow. The company's discount rate is used to discount future cash flows in a discounted cash flow analysis. The Net Present Value is the total of the discounted cash flows.
The Discounted Cash Flow analysis aims to calculate how much money in today's value an investor would get from an expected cash flow stream after accounting for the time value of money. DCF assumes that a dollar today is worth more than a dollar tomorrow. As a result, a DCF model of valuation is appropriate when a business or a company is spending or investing money in the present in hopes of generating a robust cash flow in the future.
A DCF model is one of the widely used valuation models as it encapsulates most of the key metrics in valuing a company or a business. When doing a Discounted Cash Flow analysis, you require a minimum 5-year financial plan, need to apply an appropriate DCF model discount rate to take into account the company's risk. Furthermore, a DCF model Terminal value needs to be estimated to take into account the value of a business from year 6 to eternity. The video shows in detail how to build an Excel spreadsheet with a DCF valuation model including all these components and more step by step.
Contents of this Video:
0:00 Intro
0:21 What is DCF model?
0:40 Discounted Cash Flow Key Components
1:00 DCF Model in Excel
Please let us know how you feel about building your own DCF model now. Please leave your comments below.
See also this article for an in-depth discussion on the Discounted Cash Flow works:
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