The process of DCF analysis involves several steps:
Forecasting Cash Flows: Estimate the future cash flows that the investment will generate. This requires making assumptions about revenue growth, operating expenses, capital expenditures, and other financial factors. Determining the Discount Rate: The discount rate is used to calculate the present value of future cash flows. It often reflects the cost of capital or the required rate of return. The Weighted Average Cost of Capital (WACC) is commonly used as the discount rate for DCF analysis. Calculating the Present Value: Discount the forecasted cash flows back to their present value using the discount rate. This involves using the present value formula for each cash flow. Summing the Present Values: Add up all the discounted cash flows to arrive at the total present value of the investment. This is the estimated intrinsic value of the investment.