What is the formula for calculating present value in DCF?

The present value (PV) in a discounted cash flow (DCF) analysis is calculated using the formula PV = CF / (1 + r)^n. In this formula, CF represents the cash flow from an investment or project at a given time in the future. The term 'r' stands for the discount rate, which reflects the opportunity cost of capital or the required rate of return. The symbol 'n' indicates the number of periods until the cash flow occurs.

The reasoning behind the formula is grounded in the principle of the time value of money, which asserts that a dollar received in the future is worth less than a dollar received today due to factors such as inflation, risk, and the potential earning capacity of money over time. Therefore, future cash flows must be discounted back to their present value to accurately assess their worth. Dividing the future cash flow by (1 + r)^n adjusts for the time value of money, allowing for the assessment of how much future cash flows are worth today.

This method is foundational in financial analysis and investment decision-making, as it enables investors and analysts to determine whether an investment is worthwhile compared to other opportunities.