Analysing discounted cash flow technique for investment decision.

Solutions

Expert Solution

Discounted cash flow (DCF) is a method used to determine the present value of an investment based on its future cash flows. The value of the investment today is computed based on the future cash flow projections.

The present value of future cash flows is computed by using a discount rate. Companies use the weighted average cost of capital for this purpose.

DCF is based on the concept of time value of money. In this concept it is assumed that a unit of money today is worth more than a unit tomorrow. DCF method is appropriate for analysis where the money is paid in the present with the expectations of receiving more money in the future.

If the present value of cash flow or discounted cash flow (DCF) is more than the present value of the investment cost, the investment is considered to be profitable. Investors can thus make investment decisions by comparing Discounted cash flow with Investment cost. DCF is computed by using the following formula;

= Cash flow for First year

= Cash flow for Second year

= Cash flow for Third year and so on....

The value calculated by using the formula is compared with Investment cost to take investment decision.

jeff jeffy answered 1 year ago

Next > < Previous

Related Solutions

compare the relative valuation and the discounted cash flow technique of valuation one will you prefer/...

compare the relative valuation and the discounted cash flow technique of valuation one will you prefer/ why?

What is discounted cash flow analysis and what role does it play in the financial decision...

What is discounted cash flow analysis and what role does it play in the financial decision making of a healthcare organization?

What is discounted cash flow analysis? And, what role does it play in financial decision making...

What is discounted cash flow analysis? And, what role does it play in financial decision making within a healthcare organization?

Create a Free Cash Flow and Discounted Cash Flow Statement. The tax rate and discount rate...

Create a Free Cash Flow and Discounted Cash Flow Statement. The tax rate and discount rate are not given, so the percentage below is an assumption. If there are better assumptions, then feel free to use that with a description as to why it is better. The EBIT is from the company that is trying to bought; their stand alone basis projected income statement and balance sheet. Show all calculations. Would you say the merger is a good idea? 2015...

Distinguish between the following discounted cash Flow valuation models 1) Free Cash flow to equity and...

Distinguish between the following discounted cash Flow valuation models 1) Free Cash flow to equity and 2 Free Cash flow to the firm

Discounted Cash Flow Analysis. If the appropriate discount rate for the following cash flows is 7.3%,...

Discounted Cash Flow Analysis. If the appropriate discount rate for the following cash flows is 7.3%, what is the present value of the cash flows? Please show me how to do this problem using a Texas Instruments BAII Plus Business calculator. Year Cash Flow 1 $1,200 2 1,100 3 800 4 600

What are the advantages of the discounted cash flow (DCF) approach to valuation relative to the...

What are the advantages of the discounted cash flow (DCF) approach to valuation relative to the historical book-value approach? Are there any disadvantages?

Identify and elaborate Discounted Cash Flow (DCF) and provide one example.

Describe and explain three different cash flows: operating cash flow, investment cash flow, and cash flow...

Describe and explain three different cash flows: operating cash flow, investment cash flow, and cash flow from financing activities. What is the relative importance of each, and what factors impact your assessment? Does it vary by industry or business maturity? Imagine that you were structuring a business from the ground up--what percentage of cash flow would you target for each of these three types?

MULTIPLE CHOICE: 1) Since it is based on cash flows, the discounted cash flow (DCF) method...

MULTIPLE CHOICE: 1) Since it is based on cash flows, the discounted cash flow (DCF) method of valuation has the added advantage that it is not subject to the bias of different: A. Discount rates B. Internal rates of return C. Monetary systems D. Accounting policies for determining total assets and net income 2) Which of the following budgets must be completed before preparing a cash budget? A. Cash receipts budget. B. Rolling budget. C. Cash financing budget. D. Pro...

Subjects