The calculation of discounted cash flow is one of the main aspects of the analysis of investment activities, namely the analysis of the attractiveness of an enterprise for third-party investments. This is a very powerful assessment tool, but its use requires great precision, since even a small miscalculation can lead to an incorrect result.
Instructions
Step 1
To analyze the efficiency of investments, two groups of indicators are used: taking into account the time factor and without. Discounted cash flow is a temporary indicator, since it takes into account every cash flow in the enterprise, which allows you to more accurately track the dynamics of costs and profits.
Step 2
Discounting cash flow is the adjustment of the cash flow taking into account the time value of money to the current day, i.e. by the time the investment starts. This allows us to take into account all the factors affecting cash flow, including inflation and risks.
Step 3
The formula for discounted cash flow is as follows: DCF_i = NDP_i / (1 + r) ^ i, where DCF_i is the discounted cash flow of time period i; NDP_i is the net cash flow for the same period; r is the decimal discount rate.
Step 4
Net cash flow is defined as the difference between the amounts received and the costs of the enterprise for a certain period, calculated taking into account the payment of taxes, dividends and other payments.
Step 5
After calculating the discounted cash flows for each period of time, the net discounted flow is calculated, which is equal to the sum of these values and the net cash flow for the zero period, the time of the first investment in the project: NPDP = NPH_0 + NPH_1 / (1 + r) + NPH_2 / (1 + r) ² +… + BHP_n / (1 + r) ^ n = ∑BHP_i / (1 + r) ^ i for 1 ≤ i ≤ n.
Step 6
An important aspect of correct discounting is the selection of the discount rate. There are several ways to do this: the method of assessing long-term assets, the weighted average cost of capital, cumulative construction. The latter approach is used especially often, it is based on expert risk assessment.
Step 7
The method of analyzing investments by calculating discounted cash flow is an effective, but rather laborious tool. The result of this indicator depends on how accurately and fully all cash flows in the enterprise were taken into account during the reporting period.
Step 8
The question arises of how to take into account the inflationary component. This can be done in two ways: during direct discounting when calculating the rate, or by deflating cash flows during their accounting periods. In the second method, the movements of funds are fixed, adjusted for the inflation rate as they arise.
