Discounted Cash Flow Model with Guide

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Discounted Cash Flow Model with Guide Powered By Docstoc
					Discounted Cash Flow
A dollar received today is better than a dollar received a year from now. The discounted cash flow excel
template will allow the user to evaluate the present value of the future cash at their desired discounting

Discounting rate is the level of return an investor desires from investments. The selection of discounting
rate is the desired risk rate of return a person is willing to accept in order to receive given amount of
cash at a future date for a dollar invested today. The determining of discount rate can be benchmarked
with risk free rate plus inflation rate. Risk free rate is the treasury bills market rate which is referred as
risk free rate because it is government back investment, the inflation is added to adjust the effect of
eroding future purchase value of the dollar. An alternative in determining the selection discounting rate
is applying the rate of return of similar alternative available projects.
Weighted cost of capital is widely used as the discounting rate. Discount cash flow adjust estimates the
amount to be received from investments adjusted for the time value of money. The purpose is to
analysis the attractiveness of investments using weighted cost of capital, weighted cost of capital is the
average cost for the total capital of a company. Weighted average cost of capital is usually applied by

The cash inflow cannot be evaluated for infinity and instead terminal values are used. This is because
the infinity cash inflows are not easy to estimate. Although discounted cash inflow is a strong tool for
evaluating projects, it suffers shortfalls of garbage in garbage out. A small change in cash flows can
result into a distorted valuation of the project.
The discounted cash flow template allows the users to plug in cash in flow and select the desired
discounting rate. For the purpose of evaluating business where the variable and fixed cost can be
determined, the template allows the user to plug in fixed cost and variable cost. The template calculates
the net inflow, discounts the inflows and calculates the total present value of cash flows from beginning
to the last low of keyed in data. If there are no expenses identified and the valuation is for the regular
cash flow, the user should enter the data on cash inflow column and the template will perform the
Discounted cash flows values the business worth today based on the value of the money it will generate
in future. The analysis tries to generate what the business is worth today by discounting cash inflows at
a required rate of return. Required rate of return is the rate of return a business owner expects to earn
from investments.
                                                            DISCOUNTED CASH FLOW FOR BUSINESS VALUATION/INVES
Initial Outlay/Investment          100.00

Discount Rate                             9%

                               INCOME                 EXPENSES

          Year              Cash Inflow        Fixed Cost    Variable Cost   Cash Outflow
            1                                                                     0
            2                                                                     0
            3                                                                     0
            4                                                                     0
            5                                                                     0
            6                                                                     0
            7                                                                     0
            8                                                                     0
            9                                                                     0
           10                                                                     0
           11                                                                     0
           12                                                                     0
           13                                                                     0
           14                                                                     0
           15                                                                     0
           16                                                                     0
           17                                                                     0
           18                                                                     0
           19                                                                     0
           20                                                                     0
           21                                                                     0
           22                                                                     0
           23                                                                     0
           24                                                                     0
           25                                                                     0
           26                                                                     0
           27                                                                     0
           28                                                                     0
           29                                                                     0
           30                                                                     0

Description: This Discounted Cash Flow Model provides a template worksheet to allow the user to evaluate the present value of future cash at a specified discount rate. Determining the discount rate can be a function of the risk free rate plus inflation rate, or the rate can be determined through comparables by applying a similar rate of return to analogous projects. Discounted cash flow can be used to determine the present value of a given investment and therefore used as a valuation metric when analyzing an investment opportunity.
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