✨ Discounted Cash Flow (DCF) Valuation ✨

✨ Discounted Cash Flow (DCF) Valuation ✨ is a method used to estimate the value of an investment or a company based on its expected future cash flows.

The idea is to calculate how much those future cash flows are worth in today's money 💵.

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Here's how it works:

📍 Forecast Future Cash Flows - First, you estimate the amount of money 💰 the investment or company is expected to generate in the future. This could be over the next 5, 10, or even 20 years 📅.

📍 Discount the Cash Flows - Money today is worth more than money in the future due to factors like inflation 📉 and the risk of not getting the money 🚫.

So, you "discount" the future cash flows back to their value in today's terms. This is done using a discount rate, which reflects the investment's risk ⚠️.

📍 Calculate the Present Value - After discounting, you sum up all the discounted cash flows. This gives you the present value of the future cash flows, which is considered the value of the investment or company today 🏦.

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Simple Example 📊:

Imagine you're considering buying a small business 🏢 that you expect will generate $10,000 per year for the next 5 years. You decide that, due to the risk, the discount rate should be 10% 📉.

Year 1 Cash Flow: $10,000 / (1 + 0.10)^1 = $9,091
Year 2 Cash Flow: $10,000 / (1 + 0.10)^2 = $8,264
Year 3 Cash Flow: $10,000 / (1 + 0.10)^3 = $7,513
Year 4 Cash Flow: $10,000 / (1 + 0.10)^4 = $6,830
Year 5 Cash Flow: $10,000 / (1 + 0.10)^5 = $6,209

Now, you add up all these present values: $9,091 + $8,264 + $7,513 + $6,830 + $6,209 = $37,907 💵.

So, the DCF valuation tells you that the business is worth about $37,907 today. If you can buy the business for less than this, it might be a good deal 🛒.
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