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The Basics

DCF Key Questions

Combine Action Plans


Key Points

Compounding and discounting

"Compound interest - it is the greatest mathematical discovery of all time"
Albert Einstein

Compounding: growing at a known rateCompounding

You put money in an account today (its present value - PV) for a promised rate of return (interest - INT) for a number of periods (NPER - usually months or years). The interest received in reinvested at the end of each period - it compounds. The future value (FV) is the value of the investment compounded at the end of a given number of periods. We know the value of our initial investment and the interest rate, and can calculate the FV at the end of any period.

Discounting

Discounting: what must I invest today at a given rate to have X dollars in the futureIt is the reverse of compounding. We know the how much we need on a specific date in the future (FV) and calculate how much we need to invest today, PV, at an interest rate. Work from the future back to the present.

 

You can find Excel functions to make these calculations by searching Excel's Help File for FV (compounding) or PV (discounting).

 

 

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