The DCF Model serves to determine the value of various assets and companies. The DFC Model is used in project financing and renewable energies to determine the value of wind, photovoltaic, hydro, and biomass plants.
How does a Discounted Cash Flow (DCF) Model work?
Future cash flows will be discounted from T0 onwards to determine the value at the time of the valuation date (T0). Thus, the current value, i.e., cash value, can be defined in future payments.
Fair value of money
The fair value is the reason that payment of CHF 100 has a higher value if it is received at T0 than if it is received at a later stage. The CHF 100 received at T0 has a higher value because you can invest it at an earlier stage, which yields interest earned. It constitutes one of the most vital investment calculation principles.
The DFC Model takes into account this fact and therefore offers a basis for calculating two key figures for the financing of renewable energy projects: the net present value (NPV) and the internal rate of return (IRR).
Will be explained in the video as well