gen-define-discounted-cash-flow-valuation-and-give-one-short-wor-cb17

Define discounted cash flow valuation and give one short worked example.

# Discounted Cash Flow (DCF) Valuation **Definition:** DCF valuation is a method to estimate the value of an investment based on its expected future cash flows, adjusted (discounted) to present value using a discount rate that reflects the time value of money and risk. **Core Formula:** Present Value = CF₁/(1+r)¹ + CF₂/(1+r)² + ... + CFₙ/(1+r)ⁿ Where CF = cash flow, r = discount rate, n = time period --- ## Worked Example **Scenario:** You're valuing a small business expected to generate: - Year 1: $100,000 - Year 2: $110,000 - Year 3: $120,000 - Discount rate: 10% **Calculation:** | Year | Cash Flow | Calculation | Present Value | |------|-----------|-------------|---------------| | 1 | $100,000 | $100,000/(1.10)¹ | $90,909 | | 2 | $110,000 | $110,000/(1.10)² | $90,909 | | 3 | $120,000 | $120,000/(1.10)³ | $90,158 | **Total Present Value = $272,976** **Interpretation:** Even though the business will generate $330,000 total over 3 years, its value today is approximately $273,000 because future dollars are worth less than present dollars.