$**$Discounted Cash Flow $($DCF$)$ Analysis$**$

Discounted Cash Flow $($DCF$)$ analysis is a widely used capital budgeting technique that helps businesses evaluate the financial feasibility of investment projects. It takes into account the time value of money and calculates the present value of expected cash flows generated by the project.

$**$Steps in DCF Analysis:$**$

$1.**$Estimate Cash Flows:$**$ The first step in DCF analysis is to estimate the cash flows that the project is expected to generate over its lifespan. These cash flows can include revenues, expenses, and investments required for the project. It is crucial to consider both the timing and magnitude of these cash flows.

$2.**$Determine the Discount Rate:$**$ The discount rate, also known as the required rate of return or the hurdle rate, represents the minimum rate of return expected by the company for accepting an investment project. It considers the risk associated with the project and the company's cost of capital. The discount rate is used to discount future cash flows to their present value.

$3.**$Calculate Present Value:$**$ The next step involves discounting the estimated future cash flows to their present value using the chosen discount rate. This is done by dividing each cash flow by $(1+$ discount rate$)$ raised to the power of the corresponding period. The present value of each cash flow is then summed to determine the total present value.

$4.**$Assess Net Present Value $($NPV$)$:$**$ The net present value $($NPV$)$ is calculated by subtracting the initial investment from the total present value of cash flows. A positive NPV indicates that the project is expected to generate more cash inflows than outflows, making it financially viable. Conversely, a negative NPV suggests that the project may not meet the company's required rate of return.

$5.**$Evaluate the Investment Decision:$**$ The final step involves evaluating the NPV and considering other factors such as the project's strategic fit, risk profile, and qualitative aspects. If the NPV is positive and meets the company's investment criteria, the project may be considered for implementation. However, if the NPV is negative, alternative investment opportunities may be explored.

$**$Case Study: XYZ Corporation$**$

XYZ Corporation is considering investing in a new technology platform that is expected to generate cash flows of $$200,000$ per year for the next five years. The initial investment required for the project is $$800,000.$ The company's required rate of return is $12\%.$

$**$Question:$**$

To determine the financial feasibility of the investment project, fill in the blank:

In DCF analysis, the estimated future cash flows are discounted to their present value using the $\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_,$ and the net present value $($NPV$)$ is calculated by subtracting the $\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_$ from the total present value.

A$)$ Discount rate, initial investment B$)$ Initial investment, discount rate C$)$ Hurdle rate, total present value D$)$ Total present value, hurdle rate

Please choose the correct option that fills in the blanks based on the DCF analysis.