Why a Discounted Cash Flow Model is Essential

Posted by on Jul 19, 2018 in Financial Modeling | No Comments

When raising capital or approaching the sale of an asset or business, a DCF model or discounted cash flow model is essential in determining your project or asset’s true worth. Using a discounted cash flow model will allow you to determine the current value of your asset or business based on projections of how much the business stands to make in the future.

Many of our clients use off-the-shelf software for initial screenings, but quickly move on to more robust, Excel-based financial models once the decision has been made to pursue the opportunity. This allows the complexity and uniqueness of the project to be captured, enabling better negotiations and more insightful valuations.

What is a discounted cash flow model?

Discounted cash flow models use the time value of money concept. All future cash flows are estimated and then discounted to determine the project’s value. Darby Finance develops custom, dynamic Excel-based discounted cash flow models to provide you the insight needed to make informed decisions.

Whether you are a rapidly growing energy company or an investment broker that needs to support your client’s acquisition or divestiture, you need access to a financial / economic model that will support your unique transaction.

Why should I use a discounted cash flow model?

A discounted cash flow model gives you and your stakeholders a detailed look at the true value of your asset or investment opportunity. A well-thought out model will include dynamics such as tax laws, commodity prices, and even transportation costs.

When should I use a discounted cash flow model?

After the initial “research” phase in which you are vetting potential opportunities at a high-level, you should begin development of a discounted cash flow model specific to the more promising opportunities. A discounted cash flow model will better support you after the initial screening of your project all the way through raising capital or selling the asset. The conclusions drawn from the model will guide you to deeper investment conversations, support your negotiations, and give you and your stakeholders confidence in your financial decision-making.

What are other benefits of discounted cash flow models?

Discounted cash flow models are integral to your financial decision-making process. They give you support for your investment decisions, including asset acquisitions and divestitures, as well as justification for future maintenance projects and capital expansions. Additionally, a DCF model gives you the ability to view the project and the ultimate decision on the project through the lens of other stakeholders, which can lead to more successful negotiations and more in-depth investment discussions.

Other benefits of discounted cash flow models include:

  • Collateral for Virtual Data Rooms
  • Capability to test the impact of changes in uncertain quantities and events on your project/company
  • Quantify impact of changing inputs on value metrics
  • Quantify negotiation trade-offs
  • Rank (order) potentially compelling alternative strategies for an investment decision
  • Independent, third-party valuations for joint ventures
  • Independent, third-party valuations for accounting purposes

If you’d like to see how Darby Finance can develop an effective and customized discounted cash flow model for your asset or project, contact us today.


About Darby Finance – A Leading Financial Consulting Firm

Darby Finance helps clients make better financial decisions by transforming complex data into a compelling and easy-to-understand financial story. We work alongside our clients to develop customized financial models, valuations, and sophisticated investor presentations while utilizing more than 40 years of experience in energy, finance and investor relations.

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