Calculation of DCF?

wto23 · 20 February 2008

Hi,
Has anyone here done a Discounted Cashflow calculation? If so can you give me a hand building a model to do so or show me how you did it.

cheers

rowes · 20 February 2008

Hi, was being nosey and looked it up on wikipedia, this has the formula and examples.

Not sure if this is what you were after but thought I'd mention it just in case.

http://en.wikipedia.org/wiki/Discounted_cash_flow

dhukka · 20 February 2008

My , don't do it to yourself. Don't put yourself through the process and then find out that it is a horribly flawed way to value companies. On second thought maybe it is good to learn first hand. Do yourself a favour and read this document before you start applying it.

kloid · 20 February 2008

Sure, lots of times.

I've attached an example in Excel which shows you the basics. Year 0 refers to the point at which you begin the investment/project or whatever. If you invested $15 on the 1st Jan 2008 then year 1 would refer to 31/12/08, year 2 to 31/12/09 and so on.

In the attached example the sum of all the discounted cash flows is the 8.93 (this is known as the net present value or NPV). This indicates that the investment would be worthwhile - you are giving $15 today to receive 15+8.93=23.93 over the next 10 years. If you change the discount rate to 19.3% you will see that the NPV is close to zero - this is the internal rate of return of the investment i.e. 19.3%. If the NPV is negative this would indicate that you're better off holding on to your money or investing it elsewhere. Alternatively it could be that your discount rate is too high.

hope this is useful

Kloid

doctorj · 20 February 2008

dhukka said:
Don't put yourself through the process and then find out that it is a horribly flawed way to value companies.

Care to elaborate?

dhukka · 20 February 2008

Rather than summarise the arguments, please read the document linked in my original post.

doctorj · 20 February 2008

It seems to me that article was designed to promote the use of stockval (the author's proprietary software) over DCF. I had the very same impression listening to the author at his recent ASX Investor Hour presentation.

I'd say his arguements are weak at best and well constructed to promote his product. I'll also say that the benefit an investor will get from constructing DCF models is much more than just the output - but also a much stronger understanding of the company's business and factors that are likely to have the greatest non-linear impacts on it.
Which, no matter how flawed you might believe DCF is, is something you will NEVER get from proprietary software.

dhukka · 20 February 2008

doctorj said:
It seems to me that article was designed to promote the use of stockval (the author's proprietary software) over DCF. I had the very same impression listening to the author at his recent ASX Investor Hour presentation. I'd say his arguements are weak at best and well constructed to promote his product. You'd say his arguments are weak, why?

Which particular argument or arguments? You don't need to subscribe to the author's proprietary software to understand their valuation methodology. It can be gleaned by purchasing Brian McNiven's book, Marketwise for $24.95.

doctorj said:
I'll also say that the benefit an investor will get from constructing DCF models is much more than just the output - but also a much stronger understanding of the company's business and factors that are likely to have the greatest non-linear impacts on it. Which, no matter how flawed you might believe DCF is, is something you will NEVER get from proprietary software.

I agree the software on it's own is not useful if you don't understand what goes into it. Again, Brian McNiven's book explains it in detail and that book will give you a far better understanding of how to evaluate a business than any DCF model could.

I used to be a equities analyst and have used DCF's extensively. I found them to be inadequate and unrealistic. McNiven's method is far more practical and realistic.

TheRage · 20 February 2008

dhukka said:
Which particular argument or arguments? You don't need to subscribe to the author's proprietary software to understand their valuation methodology. It can be gleaned by purchasing Brian McNiven's book, Marketwise for $24.95.

I agree the software on it's own is not useful if you don't understand what goes into it. Again, Brian McNiven's book explains it in detail and that book will give you a far better understanding of how to evaluate a business than any DCF model could.

I used to be a equities analyst and have used DCF's extensively. I found them to be inadequate and unrealistic. McNiven's method is far more practical and realistic.

I actually contructed my own spreadsheet similar to stockval from reading Market Wise. The biggest problem that I have is finding the time to input the data from each financial report. Basically I am limited by my other filter of business quality which is also another spreadsheet, including measures such as NPAT growth, operating margin growth, sales growth etc, to which stocks I will bother to look at. I have used stockVal but let my subscription lapse but might use it again as it saves me heaps of time.

For the record I believe that for the funciton of most businesses those working within the business can employ Discounted Cash Flow projections to good effect. But I conceed that with not being involved directly in the business or the supposed project this is a major downfall as too many assumptions are being made.

Calculation of DCF?

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