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Somewhat more fucked up version of a CF. We thought the situation was fucked before, now, it's a total DCF. Dumb Country Fucker. Dick Cunt Fuck A method of valuing certain stuff on fucking stupid financial statements that's really boring and stupid and gay and sucks shit. Question: "Dude, what is the value of those deferred assets in the company balance sheet? If the investor cannot access the future cash flows, or the project is very complex, DCF will not have much value and alternative models should be employed.
When a company analyzes whether it should invest in a certain project or purchase new equipment, it usually uses its weighted average cost of capital WACC as the discount rate when evaluating the DCF. The WACC incorporates the average rate of return that shareholders in the firm are expecting for the given year.
Therefore, the discounted cash flows for the project are:. Because this is a positive number, the cost of the investment today is worth it because the project will generate positive discounted cash flows above the initial cost. Dividend discount models, such as the Gordon Growth Model GGM for valuing stocks, are examples of using discounted cash flows.
The main limitation of DCF is that it requires many assumptions. For one, an investor would have to correctly estimate the future cash flows from an investment or project. The future cash flows would rely on a variety of factors, such as market demand , the status of the economy, technology, competition, and unforeseen threats or opportunities. Estimating future cash flows to be too high can result in choosing an investment that might not pay off in the future, hurting profits.
Estimating cash flows to be too low, which would make the investment appear costly, could result in missed opportunities. Choosing a discount rate for the model is also an assumption and would have to be estimated correctly for the model to be worthwhile. Calculating the DCF involves three basic steps—one, forecast the expected cash flows from the investment.
Two, you select a discount rate, typically based on the cost of financing the investment or the opportunity cost presented by alternative investments. Three, the final step is to discount the forecasted cash flows back to the present day, using a financial calculator, a spreadsheet, or a manual calculation. Corporate Finance. Financial Analysis. Tools for Fundamental Analysis.
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