# Better understand of discounted cash flow

I try to understand about DCF. reading this article https://www.investopedia.com/terms/d/dcf.asp in Alternative Investments part, can't figure out what's the calculation is used to get to \$289,157.47 current value

copying from the site above:

Alternative Investments An investor could set their DCF discount rate equal to the return they expect from an alternative investment of similar risk. For example, Aaliyah could invest \$500,000 in a new home that she expects to be able to sell in 10 years for \$750,000. Alternatively, she could invest her \$500,000 in a real estate investment trust (REIT) that is expected to return 10% per year for the next 10 years.

To simplify the example, we will assume Aaliyah is not accounting for the substitution costs of rent or tax effects between the two investments. All she needs for her DCF analysis is the discount rate (10%) and the future cash flow (\$750,000) from the future sale of her home. This DCF analysis only has one cash flow so the calculation will be easy.

In this example, Aaliyah should not invest in the house because her DCF analysis shows that its future cash flows are only worth \$289,157.47 today. Once tax effects, rent, and other factors are included, Aaliyah may find that the DCF is a little closer to the current value of the home. Although this example is oversimplified it should help illustrate some of the issues of DCF including finding appropriate discount rates and making reliable future predictions.

The video embedded in the article gives the general formula at 1:16 in, albeit amongst annoying background music and quick animations. For this particular question there is only one cash flow (the sale of the house), and they are discounting the \$750,000 received in ten years back to today's value, using a rate of return of 10% due to the (supposedly) equivalent risk of a REIT:

`````` 750,000 * (1 + 0.10)^-10 = 289,157.47
``````

In other words, if you invested 289K today at a 10% annual rate of return, in ten years you'd have 750K.

`````` 289,157.47 * (1 + 0.10) ^ 10 = 750,000
``````

To be honest, there are much better articles throughout the internet that explain discounting without the theatrics or incomplete examples.

• Thank you @D Stanley, could you advice good resource? this one is among first on finance searches in Google Jan 21, 2020 at 15:19
• @KochavaKlimuk Specific resources are off-topic, but I would just try some of the other search results. If self-learning doesn't help, find a basic finance course at your local college or university. Jan 21, 2020 at 15:40