© 2011 Sixhills Consulting LtdExtending this simple principle we see that by discounting a series of future cash receipts, we can calculate the present value of those receipts. This is the basis of a Discounted Cash Flow (DCF) modelC1+C2+C3… + Terminal value (after n years)1 + r(1 + r)2(1 + r)3(1 + r)nPV =In practice, we can often forecast cash flows only for a certain period so we calculate a ’terminal’ value by other meansC1+C2+C3… + … + …1 + r(1 + r)2(1 + r)3PV =Year 1Year 2Year 3 ………ORBasic DCF StructureP6Note that for technology investments, the life-time of the investment rarely stretches beyond 5 years, and so the use of a terminal value is generally inappropriateIT Commercial Skills Development - Part 1
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