DCF (Discount Cash Flow) Method

 Discount Cash Flow Method:

❖      Considers Time value of Money

●        Helps determine the value of an investment based on its future cash flows.

●        The present value of expected future cash flows is arrived at by using a discount rate to calculate the DCF.

●        If the DCF is above the current cost of the investment, the opportunity could result in positive returns.

●        Rs.100 receivable today is more than Rs.100 receivable a year later.

●        Hence Rs. 100 received today will earn interest or profits and shall accumulate to more than Rs. 100 in a year's time.

●        NPV (Net Present Value) or NPW (Net Present Worth) Method

●        Assuming that the Railways' cost of finance say 6% per annum, Rs. 106 received a year hence should be worth Rs.100 today and

●        Rs.100 which may be received in a year's time is worth about Rs. 94 today (actually it is worth Rs.94.34).

●        Discounted cash flow (DCF) helps determine the value of an investment based on its future cash flows.

●        The present value of expected future cash flows is arrived at by using a discount rate to calculate DCF.

●        If the (DCF is above the current cost of the investment, the opportunity could result in positive returns.