What is the typical formula used to calculate present value in a DCF?

The formula for calculating present value in a discounted cash flow (DCF) analysis is essential for determining the value of expected future cash flows in today's terms. The correct formula, which is expressed as PV = CF / (1 + r)^n, is based on the principles of time value of money.

In this formula:

• PV represents the present value,

• CF stands for the cash flow expected in a future period,

• r is the discount rate, which reflects the risk associated with the investment and the opportunity cost of capital,

• n indicates the number of periods until the cash flow is received.

This formula discounts future cash flows back to their present value, recognizing that money available today is worth more than the same amount in the future due to its potential earning capacity. By dividing the future cash flow by (1 + r) raised to the power of n, you are effectively taking into account how much less that future cash flow is worth today because of the time that will pass until it is received.

This method is foundational in financial analysis and valuation, ensuring that investment decisions are based on a correct assessment of future cash flows.