Question

Explain why DCF analysis is really a combination of DCF and direct capitalization.

Answer 1

DCF analysis is really a combination of discounted cash flow and direct capitalisation method as a discounted rate is always taken in both the methods and the project which is undertaken is capitalised.

In discounted cash flow method, the present value of cash flows which will accrue in future are discounted at present in order to arrive at the required result.

Whereas through direct capitalisation, the value of project is arrived directly by capitalising the expenses in order to arrive at the actual value of the assets so these both methods are highly interrelated. DCF analysis is a combination of both discounted cash flows and direct capitalisation method