How Do You Calculate Discounted Cash Flows?
There are two primary ways in which investors analyze stocks: technical and fundamental analysis. Technical analysis helps the investor determine the best to time to invest in a security or project, whereas fundamental analysis helps investors determine what to buy. One of the most common valuation measures used in fundamental analysis is discounted cash flow, which looks at the present value of future cash flows. Forecast a company’s net income and depreciation expense projected over five years. If you do not know how to forecast, assume a 5 percent growth rate and apply it to the current year’s net income and depreciation during the next five years. For instance, if net income is $100,000 and depreciation expense is currently $5,000, you can multiply both amounts by 1 + ‘the growth rate’ for the following year’s forecast. The calculation is $100,000 x 1.05 = $105,000; $5,000 x 1.05 = $5,250. Now apply a growth rate to these numbers for the second year of forecasts. Calculate future c
