Every business owner should understand...
Discounted Cash Flow (DCF) Analysis 📈👇
Crunching numbers isn’t just for Wall Street.
A DCF analysis is a powerful tool that small and medium businesses can use to make better financial decisions.
Here’s why it matters:
Real Value: DCF provides an intrinsic value based on future cash flows—essential for making strategic investment choices.
Long-Term Focus: It helps you project returns over time, considering risks and helping you avoid short-term thinking.
Empowered Decisions: DCF gives insights into your business’s value, so you’re prepared for negotiations and growth planning.
Let’s Break Down the DCF Calculation:
Say you expect $10,000 next year and $12,000 the year after.
Here’s how to calculate their value today using DCF:
1. Identify your cash flows: Year 1 = $10,000, Year 2 = $12,000.
2. Pick a discount rate: For example, 8% (0.08).
3. Calculate each year’s present value:
Year 1: Cash Flow / (1 + Discount Rate)^Year = $10,000 / (1 + 0.08) = $10,000 / 1.08 = $9,259
Year 2: Cash Flow / (1 + Discount Rate)^Year = $12,000 / (1 + 0.08)^2 = $12,000 / 1.1664 = $10,292
4. Add them up: $9,259 + $10,292 = $19,551 total present value.
Looks complicated? Don't worry, we're building all sorts of free calculators lately, we'll publish our first one tomorrow!
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