Question

Steps in the DCF (Discounted cash flow approach)

a) Estimate the present value of annual free cash flows.
b) Add the present value of the terminal or residual value.
c) Add the present value of the existing tax shield on existing assets.
d) Subtract the net realizable value of redundant assets, less redundant liabilities.

Answer 1

The steps in the DCF approach include estimating the present value of free cash flows, adding the present value of the terminal value, accounting for tax shields, and adjusting for redundant assets and liabilities.

Step-by-step explanation:

The question pertains to the steps in the Discounted Cash Flow (DCF) approach, which is a valuation method used to assess the attractiveness of an investment opportunity. The DCF approach involves the following steps:

1. Estimate the present value of annual free cash flows.
2. Add the present value of the terminal or residual value.
3. Add the present value of the existing tax shield on existing assets.
4. Subtract the net realizable value of redundant assets, less redundant liabilities.

The present discounted value is a crucial concept in this process, as it allows businesses and governments to compare present costs with future benefits. This tool is indispensable across various contexts, such as capital investments, government project evaluations, environmental policy decision-making, and even calculating lottery winnings.