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Discounted Cash Flow Example - Pretzels Unlimited - Present Value
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YearCash FlowsPresent Value MultiplierPresent Value of Cash FlowComments $ 22.00 Current Market Price
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2022 $ 2.00 0.893 $ 1.786 $2.00 dividend12% Required Rate of Return
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2023 $ 2.20 0.797 $ 1.754 $2.20 dividend
We expect to receive the dividends as described and
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2024 $ 2.30 0.712 $ 1.637 $2.30 dividend
we expect the stock price to be $27 at the end of 2023.
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2025 $ 29.30 0.636 $ 18.621 $2.30 dividend + $27 proceeds from sale of stock
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Total: $ 23.797 Present value of stock =SUM(discounted-cash-flows)
Yes, this is potentially a good investment for us. We
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We calculate that the present value of the future cash
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Present Value Multiplier = 1 / (1+Rate)Time
flows from the dividends and the sale of the stock is
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approximately $23.80. However, the market price is only
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Q) Why is the spreadsheet's final value differ by a few cents from our manual calculation?
only $22.00. We can buy $23.80 of value for only $22.
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A) Because the spreadsheet's present value multipliers have more precision than our table.
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But always remember, we are simply identifying good
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potential investments. We must do much more research
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and exercise sound judgment when selecting a company
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a company to invest in.
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