## What Is Discounted Cash Flow (DCF) Formula?

The **Discounted Cash Flow (DCF) formula** is a valuation method that helps to determine the fair value by discounting future expected cash flows.

This is the formula:

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

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

**r = Discount rate**

**t = Period of time (1,2,3,……,n)**

## Discounted Cash Flow (DCF) vs. Net Present Value (NPV)

The discounted cash flow (**DCF**) and the net present value (**NPV**) have common objectives.

**The NPV formula **shows their difference.

`=NPV(discount rate, series of cash flows)`

In the formula, all cash flows received are distributed in equal time or periods: years, quarters or months.

The **DCF **formula is applicable to different periods of time.

In the sample dataset the discounted cash flow (**DCF**) formula is used to calculate the free cashflow to firm (**FCFF**) and the free cash flow to equity (**FCFE**).

## 1. Using the Discounted Cash Flow Formula in Excel to Calculate Free Cashflow to Firm (FCFF)

- Enter this formula in
**C11**to calculate the**Total**amount of equity and debt.

`=C8+C9`

- Press
**Enter**.

- Enter this formula in
**Â C12**and press**Enter**to find the**Cost of Debt**.

`=C6*(1-C7)`

- Go to the
**Dataset**worksheet. - Enter this formula in
**C13**to calculate the**Weighted Average Cost of Capital (WACC)**.

`=C5*(C8/C11)+C12*(C9/C11)`

- Press
**Enter.**

- In a new worksheet, enter each period of time in
**Â B5:B9**. - Use this formula to calculate
**FCFF**for each year in**Â C5:C9**.

`FCFF = Cash Flow From Operations + Interest Expense * (1 â€“ Tax Rate) â€“ Capital Expenditures (CAPEX)`

- Enter the value of
**WACC**in**C11**. - Enter the
**DCF**formula in**C12**.

`=C5/(1+C11)^B5+C6/(1+C11)^B6+C7/(1+C11)^B7+C8/(1+C11)^B8+C9/(1+C11)^B9`

- Press
**Enter**. - This is the final output of
**FCFF**for the total time period with the**DCF**formula.

**Read More: **How to Calculate Payback Period in Excel

## 2. Calculating the Free Cashflow to Equity (FCFE) Using the Discounted Cash Flow Formula in Excel

- Add the
**Interest Expenses**from the previous output in**Â D5:D9**in a new worksheet.

- Enter this formula in
**E5**to findÂ**FCFE**for the**1st**year.

`=C5-D5`

- Use the
**AutoFill**Â to calculate**FCFE**for each year in**Â D6:D9**.

- Enter the value of
**Cost of Equity**from the**Dataset**in**C11**. - Use the
**DCF**formula in**C12**and press**Enter**.

`=E5/(1+C11)^B5+E6/(1+C11)^B6+E7/(1+C11)^B7+E8/(1+C11)^B8+E9/(1+C11)^B9`

- This is the output.

**Read More: **How to Calculate Payback Period with Uneven Cash Flows

## Pros and Cons of the Discounted Cash Flow (DCF) Formula in Excel

**Pros:**

- It is an extremely detailed process that requires information on the growth rate, equity and overall balance sheet of a year.
- The
**DCF**formula helps to find the nearest exact value. - It is very helpful to understand present business conditions and predict future investment.
- The main advantage of the
**DCF**formula is that it calculates the**Internal Rate of Return**(**IRR**).

**Cons:**

- The
**DCF**formula is sometimes difficult to perform. The data for**DCF**analysis is very difficult to obtain.

**Read More: **Calculating Payback Period in Excel with Uneven Cash Flows

**Download Practice Workbook**

Download the sample file and practice.

**Related Articles**

- How to Calculate Discounted Payback Period in Excel
- How to Calculate Operating Cash Flow in ExcelÂ
- How to Calculate Net Cash Flow in ExcelÂ
- How to Create a Cash Flow Waterfall Chart in Excel
- How to Calculate Incremental Cash Flow in Excel
- How to Forecast Cash Flow in Excel
- How to Calculate Cumulative Cash Flow in Excel

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