Definition

Discounted Cash Flow 20-year (DCF-20) Value is a valuation method used to estimate the value of an investment based on its expected future cash flows over a 20-year period, which are adjusted to present value using a discount rate.

How to use the valuation method

To use the DCF-20 valuation method, forecast the expected cash flows for each of the next 20 years. Choose an appropriate discount rate, often the weighted average cost of capital (WACC), to reflect the risk of the investment. Calculate the present value of each year's cash flow using the formula, and sum these values. Next, add the cash per share value and minus the debt per share value to get the DCF-20 Value.

Which industries it work best in

The DCF-20 method works best in industries with stable and predictable cash flows, such as utilities, consumer staples, and mature manufacturing companies. These industries typically have less volatility and more reliable financial projections.

Which industries it does not apply to and why

The DCF-20 method is less applicable to industries with high volatility and uncertain cash flows, such as technology startups, biotech firms, and other high-growth sectors. These industries often face rapid changes and have less predictable financial outcomes, making long-term cash flow projections challenging.

Summary

The DCF-20 Value is a useful tool for valuing investments with predictable cash flows over a long-term horizon. It is best suited for stable industries and less effective for high-growth or volatile sectors due to the difficulty in accurately forecasting long-term cash flows.