Practice Problem – Discounted Cash Flow

Practice Question

Cases in Finance
Valuation Tools
Discounted Cash Flow
True or False

The Discounted Cash Flow (DCF) method does not account for changes in working capital.

Answer +
FALSE
Step-by-step solutions +

Step 1: Understand what the DCF method includes.

The DCF method estimates the value of an investment based on its expected future cash flows, which are discounted back to present value using an appropriate discount rate.

Step 2: Identify components of free cash flow (FCF) in DCF analysis:

  • EBIT (Earnings Before Interest and Taxes)
  • Less: Taxes
  • Plus: Depreciation and Amortization
  • Less: Changes in Net Working Capital (NWC)
  • Less: Capital Expenditures

Step 3: Conclusion

Changes in working capital are explicitly included in free cash flow calculations, which are central to DCF. Therefore, the statement is FALSE.