How to calculate discounted cash flow

The calculation of the discounted cash flow is one of the main aspects of investment activity, namely an analysis of the attractiveness of the enterprise for third-party attachments. This is a very strong assessment tool, but its use requires great precision, since even a small miscalculation can lead to incorrect results.

Instruction

For the analysis of investment performance used two groups of indicators: given the time factor and without. Discounted cash flow is a temporary measure, because it takes into account each cash flow at the company, which allows you to more accurately follow the dynamics of costs and profits.

Discounting cash flow is the reduction of cash flow taking into account the time value of money to the current day, i.e. at the beginning of the investment. This allows to take into account all factors affecting cash flow, including inflation and risk.

The formula for discounted cash flow as follows:DP = CDP/(1 + r)^i where:DDP – discounted cash flow time period i;CDP – net cash flow during the same period;r – discount rate in decimal form.

Net cash flow is defined as the difference between the incoming values and costs of the enterprise for the period, calculated taking into account taxes, dividends and other payments.

After the calculation of discounted cash flows for each time period calculated net present value of the stream that is equal to the sum of these variables and net cash flow at period zero, the time of the first investment in the project:CDP = ЧДП_0 + ЧДП_1/(1 + r) + ЧДП_2/(1 + r)2 + ... + CDPP/(1 + r)^n = ∑CDP/(1 + r)^i, with 1 ≤ i ≤ n.

An important aspect of the proper conduct of discounting is the discount rate. For this there are several methods: a method of evaluating long-term assets, weighted average cost of capital, the cumulative build. The latter approach is used most often, it is based on expert risk assessment.

The method of analysis of investments by calculating discounted cash flow is effective, but labor-intensive means. The result of this indicator depends on how precise and full account of all the cash flows at the company during the reporting period.

The question arises how to account for the inflationary component. This can be done in two ways: during direct discounting when calculating the rate, or by deflating the cash flows in the periods of their registration. In the second method the movement of funds is recorded, adjusted for the inflation factor as they arise.

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