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What is discounted cash flow analysis

what is discounted cash flow analysis

DCF Advantages and Disadvantages, pROs and CONs of Using DCF.
5 or 10 years so this is a discount coupon malaysia airlines mechanism for estimating the future value of the businesss cash flows after that projection period.
Calculate the TV, calculate the enterprise value (EV) by discounting the projected ufcfs and TV to net present value.Select rather than, sensitize.Involves forecasting future performance, which is very difficult.It is very easy to increase or decrease the valuation from a DCF substantially by changing the assumptions, which is why it is so important to be thoughtful when specifying the inputs.The DCF analysis also allows different components of a business or synergies to be valued separately.Put simply, it is a function of the alternative investment opportunities available to all of the investors in the company, and the riskiness of making that investment in the company relative to those available alternative returns.If the risk-equivalent return in other opportunities is X per year, then an investor should require X from this investment as well.
Examples of this calculation are discussed later in this section.Cost of Equity: The Risk Free Rate: The risk-free rate is needed in determining the Cost of Equity, and is estimated as a function of the current long-term Treasury Bond rate (assuming that the companys cash flows are being projected in terms of US).If using internal estimates, be sure to note how they were generated and for what purpose.Terminal Value: The value of a business at the end of the projection period (typical for a DCF analysis is either a 5-year projection period or, occasionally, a 10-year projection period).Treasury bond rates on a daily basis.The further these numbers are projected out, the less visibility the forecaster will have (in other words, later projection periods will typically be subject to the most estimation error).