From the course: Financial Modeling and Forecasting Financial Statements (2019)
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Financial forecasts and investment decisions
From the course: Financial Modeling and Forecasting Financial Statements (2019)
Financial forecasts and investment decisions
- The fundamental model for estimating the value of a business or any other asset is called discounted cash flow analysis, or DCF for short. A DCF, or discounted cash flow analysis, requires that we have a number for the interest rate so that we can do the discounting, and also that we have forecasts for the cash flows. For example, to use DCF in estimating the value of a piece of commercial real estate, you would estimate the annual net cash flows to be generated by the property, plus the amount for which the real estate could be sold at some future terminal period. All of these cash flows would then be discounted to the present using an appropriate interest rate. Yikes, that sounds difficult! So, let's take this step by step, and we'll start with the time value of money. The concept of the time value of money can be summarized as follows. Money now is worth more than the same amount of money to be received in the…
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