Question

Please I want explain for this  topic in details

Q)explain the discounted cash flow

Answer 1

Discounting cash flow method is a method in which cash flows which are due to the company in the future are discounted at the present value.

it is based upon the calculation of sum of future discounted cash flows in order to determine how much the investment is worth at the present and this will help in determination of the fair value of most type of investments and this will be also used in capital budgeting decision as well.

It is the sum of all future discounted cash flows that the investment is expected to produce and this is the fair value which is generated at the present after discounting and it is done by ascertainment of a discount rate which is based upon various kinds of factors, most importantly the weighted average cost of capital or adjustment of risk into the weighted average cost of capital.

It has a higher applicability in various methods which are used for capital budgeting like Net present value method, in which the basis of determination of present value is discounted cash flows and internal rate of return method in which there is a focus at finding a specific rate at which cash flows are to be discounted. it is also used in discounted payback period method as well.

So, it can be summed up that discounted cash flows is one of the most used method in the overall financing world, which is focused at determination of a fair value of the stream of the cash flows at the present, and it is decided based upon the present value weather to invest into those projects or not.