Course 404: Putting DCF into Action Step 3--Discount Projected Free Cash Flows to Present The next step is to discount each of the individual year's cash flows to express them in terms of today's dollars. Remember we are using the following formula, and the "discount factor" just represents the denominator in the equation. We can then multiply each year's cash flow by the discount factor to get the present value of each cash flow. Present Value of Cash Flow in Year N = CF at Year N / (1 + R)^N CF = Cash Flow R = Required Return (Discount Rate), in this case 9% N = Number of Years in the Future Last Year: \$500.00 Year 1: 575.00 x (1 / 1.09^1) = 528 Year 2: 661.25 x (1 / 1.09^2) = 557 Year 3: 760.44 x (1 / 1.09^3) = 587 Year 4: 874.50 x (1 / 1.09^4) = 620 Year 5: 1005.68 x (1 / 1.09^5) = 654 Year 6: 1055.96 x (1 / 1.09^6) = 630 Year 7: 1108.76 x (1 / 1.09^7) = 607 Year 8: 1164.20 x (1 / 1.09^8) = 584 Year 9: 1222.41 x (1 / 1.09^9) = 563 Year 10: 1283.53 x (1 / 1.09^10) = 542 We then add up all the discounted cash flows from Years 1 through 10, and come up with a value of \$5,870 million (\$5.87 billion).
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