A Discounted Cash Flow model is a specific type of financial model used to value a business. DCF stands for Discounted Cash Flow, so a DCF model is simply a forecast of a company’s unlevered free cash flow discounted back to today’s value, which is called the Net Present Value (NPV).
Discounted Cash Flow is a valuation method that is used to estimate the attractiveness of an investment opportunity. It analyzes future free cash flow projects and discounts them by using an annual rate (typically a firm's Weighted Average Cost of Captial), which then gives us the present value estimates. This present value estimate is then used to evaluate the potential for investment. If the value is higher than the current cost of the investment, the opportunity may be a desirable one.
The basic building block of a DCF model is the 3 Statement Financial Model, which links the financials together. Once you have downloaded this tool, you will see the step-by-step methodology that accompanies the DCF template.
[caption id="attachment_319" align="alignnone" width="1000"] Screenshot from the model.[/caption]
DCF Excel Model Building Tips
After downloading the template you may wish to make some changes to the Excel file. Here are some tips and best practices for building a robust model.
- Format all assumptions and hardcoded numbers with a blue font
- Ensure all formulas are formatted as a black font
- Break down complex formulas into simpler steps
- Use headings and title to keep your model organized
- Audit the formulas and functions
- Create charts and graphs to display the output of your results
- To learn more, check out CFI's Free Excel Crash Course
Thank you for downloading this free DCF Model Excel template, we hope you find it useful!