The core economic tenet that people invest in future anticipated gains rather than now consumption is adhered to by the discounted cash flow model. The present investment’s worth ought to be equal to or less than the present value of the anticipated future cash flows, according to logic. The investment is profitable only after that. In this article, I am going to explain how to calculate Discounted Cash Flow in Excel. I hope it will be helpful for the related people with it.
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What Is Discounted Cash Flow?
What your future cash flow is worth in terms of today’s value is known as Discounted Cash Flow. The PV (present value) of a future cash flow is another name for this. Discounted Cash Flow helps the investors to assess how much money goes into investment as well as when that money is spent, how much money the investment generates, and when the investor can access the proceeds from the investment.
Keep it in mind that it’s a predicted value, the estimated and actual value may differ so for a model where the actual value is the prime requirement may not be suitable with this.
Formula of Discounted Cash Flow Calculation
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.
CFt = Cash flow in period t (time)
r = Discount rate
t = Period of time (1,2,3,……,n)
Step by Step Procedures to Calculate Discounted Cash Flow in Excel
We can easily calculate the Discounted Cash Flow and validate it. We just need to follow the following steps:
- Calculation of Present Value
- Discounted cash Flow Calculation
- Validation of Discounted cash Flow
Step- 01: Calculation of Present Value
Discounted Cash Flow is actually a valuation method that is used to forecast future gainings based on the present investment. For this, we need to calculate the Present Value first.
- Consider a cash flow for every year. In my case, I have considered a $50,000 cash flow every year. You can consider different amounts in different years too.
- Take into account a Discount Rate. The Discount Rate symbolizes the interest rate to calculate the future cash flow based on the current situation. Here, I took 10% as the discount rate.
- Input the following formula to calculate the present value after 1 year.
C6 = Cash Flow after first year
G5 = Discount Rate
B6 = Period of Time
- Press ENTER to have the output.
Step- 02: Discounted Cash Flow Calculation
Discounted Cash Flow is calculated in this section using the Present Value calculated in the above section.
- Estimate the total value of the Present Values. Input the following formula for that purpose:
Here, the SUM function adds the present value over the 20 years of cash flow.
- Press ENTER to have the result.
The total present value of the payments is $425,678.19. The total cash flow is $1,000,000. We are losing a lot of value due to the time value of money at a 10% rate every year.
Step- 03: Validation of Discounted Cash Flow
To validate the Discounted Cash Flow, We are gonna compare the End Value of our investments over the years with the total Lump Sum value.
- Calculate the profit of the investments in a column. Here, I have assumed a profit 0f 10% based on the invested amount and listed it in the Return column.
- Use the following formula to calculate the return:
F6 = End Value of the previous year
I5 = Return Rate
- Press ENTER button to have the return value.
- Followingly, calculate the End Value with the addition of Return using the following formula:
F6 = End Value of the previous year
C7 = Cash Flow of the current year
E7 = Return value of that year
- Hit the ENTER button to have the output.
- Now, AutoFill the Return and End Value columns.
Thus, we can have the projected End Value after 20 years.
- Now, consider the total present value as the Lump Sum value for the beginning of the investment.
- Input the following formula to have the Lump Sum value for the following year:
G5 = Lump Sum Value
J5 = Discount rate
- Press ENTER to have the Lump Sum value of the year.
- Finally, AutoFill the rests.
At the end, we can see that the End Value and the Lump Sum value is equal at the end of the whole time period. So, we can say with full confidence that our Discounted Cash Flow calculation is accurate.
That’s all for this article. In the end, I like to add that I have tried to explain step-by-step procedures of how to calculate Discounted Cash Flow in Excel. It will be a matter of great pleasure for me if this article could help any Excel user even a little. For any further queries, comment below. You can visit our Exceldemy site for more details on Excel.
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