## What Is Discounted Cash Flow?

What your** future cash flow** is worth in terms of today’s value is known as **Discounted Cash Flow.**

## Formula to Calculate The Discounted Cash Flow

The total amount of the cash flow for every period of time divided by one increment of the discount rate raised to the power of the period count is the **Discounted Cash Flow** (DCF) formula.

`DCF=CFt/(1+r)^t`

**CFt** = Cash flow in period t (time)

**r** = Discount rate

**t** = Period of time (1,2,3,â€¦â€¦,n)

__Step 1__: Calculation of the Present Value

__Step 1__

** Steps**:

- Consider a cash flow for every year. Here, $50,000.

- Consider the
**Discount Rate**. It symbolizes the interest rate to calculate the future cash flow based on the current situation. Here, 10% as the discount rate. - Enter the following formula to calculate the present value after 1 year.

`=C6/(1+$G$5)^B6`

**C6 **= Cash Flow after the first year

**G5 **= Discount Rate

**B6** = Period of Time

- Press
**ENTER**to see the output.

- Drag down the
**Fill Handle**to**AutoFill**the rest of the cells.

**Read More:** How to Calculate Annual Cash Flow in Excel

__Step 2__: Calculating the Discounted Cash Flow in Excel

__Step 2__

** Steps**:

- Estimate the total value of the
**Present Value**. Enter the following formula:

`=SUM(D6:D25)`

**The SUM function **adds the present value over 20 years of cash flow.

- Press
**ENTER**to see the result.

The total present value of the payment is $425,678.19. The total cash flow is $1,000,000.

**Read More:** How to Calculate Incremental Cash Flow in Excel

__Step 3 –__ Validation of the Discounted Cash Flow Calculation in Excel

__Step 3 –__

Compare the **End Value **of the investments over the years with the total **Lump Sum **value.

** Steps**:

- Calculate the profit of the investments in a column. Here, a profit 0f 10% was assumed based on the invested amount and listed in the
**ReturnÂ**column. - Use the following formula to calculate the return:

`=F6*$I$5`

**F6 **= End Value of the previous year

**I5 **= Return Rate

- Press
**ENTER**to see the return value.

- Calculate the
**End Value**using the following formula:

`=F6+C7+E7`

**F6 **= End Value of the previous year

**C7 **= Cash Flow of the current year

**E7 **= Return value of that year

- Press
**ENTER**to see the output.

**AutoFill**the**Return**and**End ValueÂ**columns.

The projected **End Value** after 20 years is calculated.

- Consider the total present value as the
**Lump Sum**value for the beginning of the investment. - Enter the following formula to get the
**Lump Sum**value for the following year:

`=G5*(1+$J$5)`

**G5 **= Lump Sum Value

**J5 **= Discount rate

- Press
**ENTER**to see the**Lump Sum**value.

**AutoFill**the rest of the cells.

The **End Value **and the **Lump Sum **value is equal at the end of the time period. The **Discounted Cash Flow **calculation is accurate.

**Read More: **How to Forecast Cash Flow in Excel

**Download Practice Workbook**

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thank you

being a non finance person, this is really helpful for me to derive DCF for a project

Hello

Vijiaselvam Nayagam,You are most welcome.

Regards

ExcelDemy