DCF (Discounted Cash Flow)
- You might buy some insurance investment plan where they give you payout for
X years.
- probably useful for stonk analysis? idk havent learn yet
Discounted and Compounded Value
As long as you understand discount (in supermarket/taobao whatever) you should be able to understand this. A future cash flow (in this case cash flow just means future money you receive) needs to be discounted to find the present value (how much this investment is currently worth). This is because over the years the investment will increase by simple/compound interest per last lecture.
A present value of investment needs to be compounded to find the future value.
Eg: $1000 dollars investment, 5% yearly compound interest. Your present value of investment is $1000. It needs to be compounded (1000 * (1+0.05) = $1050) to get the future value ($1050).
We will be using Excel to solve subsequent questions. If you dont have excel, please feel free to use Google Sheets.
Suppose you are looking at the following possible cash flows:
1.Year 1 CF =$100;
2.Years 2 and 3 CFs = $200;
3.Years 4 and 5 CFs = $300.
The required discount rate is 7%. What is the value of the cash flows at year 5?
Hint: At year 1, your pmt (in years) is 4. Your interest rate is same as discount rate, 7%. How much is the future value of Year 1 CF?
- What is the value of the cash flows today?
- What is the value of the cash flows at year 3?
Lets try a few more finance questions~
You want to receive 5,000 per month in retirement. If you can earn 0.75% per month and you expect to need the income for 25 years, how much do you need to have in your account at retirement?
You want to receive $5,000 per month for the next 5 years. How much would you need to deposit today if you can earn 0.75% per month?
What monthly rate would you need to earn if you only have $200,000 to deposit?
Suppose you have $200,000 to deposit and can earn 0.75% per month. How many months could you receive the $5,000 payment?
How much could you receive every month for 5 years?
You likely dont need this video, but here is an example DCF Cash Flow:
Download DCF Excel File Walkthrough