Overview
Discounted Cash Flow (DCF) Analysis is a vital tool in finance that helps investors assess the value of an investment by estimating its future cash flows and adjusting them for the time value of money. By understanding the principles of cash flows, present value, and discount rates, investors can ma...
Key Terms
Example: Positive cash flow indicates that a company is generating more money than it is spending.
Example: If you expect to receive $100 in a year, its present value at a 5% discount rate is about $95.24.
Example: A higher discount rate reduces the present value of future cash flows.
Example: An NPV greater than zero indicates a profitable investment.
Example: WACC is used as a discount rate in DCF analysis.
Example: A long-term investment horizon may justify higher risk investments.