1. The problem is to understand and perform a Discounted Cash Flow (DCF) analysis, which is used to estimate the value of an investment based on its expected future cash flows. 2. The formula for DCF is: $$\text{DCF} = \sum_{t=1}^n \frac{CF_t}{(1+r)^t}$$ where $CF_t$ is the cash flow at time $t$, $r$ is the discount rate, and $n$ is the number of periods. 3. Important rules: - Future cash flows are discounted back to their present value. - The discount rate reflects the risk and time value of money. 4. To perform DCF: - Identify the expected cash flows for each period. - Choose an appropriate discount rate. - Calculate the present value of each cash flow using the formula. - Sum all present values to get the total DCF. 5. Example: Suppose cash flows for 3 years are 100, 150, and 200, and the discount rate is 10%. 6. Calculate each present value: $$\frac{100}{(1+0.10)^1} = \frac{100}{1.10} = 90.91$$ $$\frac{150}{(1+0.10)^2} = \frac{150}{1.21} = 123.97$$ $$\frac{200}{(1+0.10)^3} = \frac{200}{1.331} = 150.26$$ 7. Sum the present values: $$90.91 + 123.97 + 150.26 = 365.14$$ 8. Therefore, the DCF value of the investment is approximately 365.14.