While undertaking the valuation of any company there are three broad approaches to valuation Asset Approach, Income Approach and Market Approach. Discounted cash flow (DCF) is one of the prominent Income approaches to valuation and is used to estimate the attractiveness of any Investment opportunity on the basis of future cash flow projections of business. So far DCF is considered as the most scientific financial tool to derive the value of any company based on parameters like Projected Cash Flows, Cost of Capital, Growth cycle of Business, perpetual growth rate etc. This method mostly yields control valuation result and is sensitive to even minor changes in these parameters. It is strongly recommended to do sanity check with the other approaches of valuation before concluding the DCF value.

Steps in present value measurement in DCF

• Estimate future cash flows using best information available in circumstances (adjusting for Discontinuation of any part of business, Business Expansion or Diversification);
• Discount rates should reflect assumptions consistent with those inherent in Cash Flows. It should also be as per the underlying economic factors of currency in which cash flows are denominated. Company Specific Risk Factors (CSRP) and Small Company Risk Factors (SCRP) should be duly adjusted;
• In case profits are expected to be realized after a lapse of some years or if material amount is to be incurred before profits are realized, due consideration have to be given to these circumstances
• Appropriate allowance should be made for Capital Expenditure and Working Capital in Projections (for growth and also for existing capacity);
• Perpetuity should be applied once the business has stabilized

We as Discounted Cash Flow Valuation consultants use DCF methodology majorly in cases where we have to judge the value of business based on its future potential. We have a specialized team which comes in a league of one of the best DCF Valuation Consultants.