The term Discounted Cash Flow is a very common one in the field of finance and accounting. It determines the decision to buy or sell a company in the business sector. Microsoft Excel has made our work easier with the Discounted Cash Flow Formula. It is used to determine the value of a business or security.Â It represents the value of an investor and his/her willingness to pay for an investment, with a rate of return on their investment. In this article, we will explore the discounted cash flow formula in excel with 2 ideal examples.

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## 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. Under this method, the future cash flows are assumed according to the companyâ€™s life or asset which is unlimited. It also includes a discount rate that discounts the aforementioned cash flows to reach the present value. The formula states this:

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

Here,

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

**r = Discount rate**

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

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

The discounted cash flow (**DCF**) is often mixed with the concept of net present value (**NPV**). Though both of their objectives are the same, there is a certain difference. **The NPV formula **in excel will make it clearer.

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

Here, the formula states that all the cash flows received are distributed in equal time or periods, whether years, quarters or months.

On the other hand, the **DCF **formula is applicable for different periods of time.

We can apply the discounted cash flow (**DCF**) formula in excel to calculate the free cashflow to firm (**FCFF**) and the free cash flow to equity (**FCFE**) in excel. For this, here is a dataset defining the values of the cost of equity, debt rate and tax rate. It also shows the value of equity and outstanding debt.

Now, letâ€™s see 2 examples below of applying the discounted cash flow formula in excel.

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

In this example, we will calculate the free cashflow to firm (**FCFF**) with discounted cash flow (**DCF**) formula. Follow the steps below:

- Firstly, insert this formula in cell
**C11**to calculate the**Total**amount of equity and debt.

`=C8+C9`

- Hit
**Enter**.

- Secondly, insert this formula in
**cell C12**and click on the**Enter**key to find out the**Cost of Debt**.

`=C6*(1-C7)`

- Following, go to the
**Dataset**worksheet. - After that, insert this formula in
**cell C13**to calculate the**Weighted Average Cost of Capital (WACC)**.

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

- Click on
**Enter.**

- Now, take a new worksheet and insert each period of time in
**cell range B5:B9**. - Next, apply this formula to calculate
**FCFF**for each year in**cell range C5:C9**.

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

- Then, insert the value of
**WACC**in**cell C11**. - Finally, insert the
**DCF**formula in cell**C12**.

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

- Press the
**Enter**key. - Thatâ€™s it, here 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 Free Cashflow to Equity (FCFE) Using Discounted Cash Flow Formula in Excel

In this section, we will calculate the free cashflow to equity (**FCFE**) with the discounted cash flow (**DCF**) formula. Here, we will work on the same dataset as above. Letâ€™s see the process below:

- First, add the
**Interest Expenses**on the previous output in**cell range D5:D9**in a new worksheet.

- Then, insert this formula in
**cell E5**to find out**FCFE**for the**1st**year.

`=C5-D5`

- After that, use the
**AutoFill**tool to calculate**FCFE**for each year in**cell range D6:D9**.

- Now, insert the value of
**Cost of Equity**from the**Dataset**in**cell C11**. - Next, apply the
**DCF**formula in**cell C12**and hit**Enter**.

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

- Finally, we have our final result.

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

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

The discounted cash flow (**DCF**) formula is a very popular one, yet has some pros and cons during the work procedure.

**Pros:**

- It is an extremely detailed process that requires information on the growth rate, equity and overall balance sheet of a certain year.
- The
**DCF**formula helps to find out 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 as it is a lengthy process.

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

**Download Practice Workbook**

Download the sample file and practice it.

## Conclusion

Concluding this article with the hope that it was a helpful one for you on the discounted cash flow formula in excel with 2 ideal examples.