If a project is financed through both debt and equity, the weighted-average cost of capital (WACC) approach can apply. The cost of capital is usually used as the discount rate, which can be very different for different projects or investments. Then, you need to determine the appropriate rate to discount the cash flows to a present value. A future cash flow might be negative if additional investment is required for that period. The period of estimation can be your investment horizon. The first step in conducting a DCF analysis is to estimate the future cash flows for a specific time period, as well as the terminal value of the investment. If the DCF is lower than the present cost, investors should rather hold the cash. The higher the DCF, the greater return the investment generates. If the DCF is greater than the present cost, the investment is profitable. The DCF is often compared with the initial investment. It can be applied to any projects or investments that are expected to generate future cash flows. Future cash flows, the terminal value, and the discount rate should be reasonably estimated to conduct a DCF analysis.ĭCF analysis estimates the value of return that investment generates after adjusting for the time value of money.A project or investment is profitable if its DCF is higher than the initial cost.
0 Comments
Leave a Reply. |