Discounted Cash Flow (DCF)
Discounted cash flow (DCF) refers to a valuation method that estimates the value of an investment using
its expected future cash flows.
DCF analysis attempts to determine the value of an investment today, based on projections of how much
money that investment will generate in the future.
It can help those considering whether to acquire a company or buy securities. Discounted cash flow
analysis can also assist business owners and managers in making capital budgeting or operating
expenditures decisions.
- Discounted cash flow analysis helps to determine the value of an investment based on its future cash
flows. - The present value of expected future cash flows is arrived at by using a projected discount rate.
- If the DCF is higher than the current cost of the investment, the opportunity could result in positive
returns and may be worthwhile. - Companies typically use the weighted average cost of capital (WACC) for the discount rate because it
accounts for the rate of return expected by shareholders. - A disadvantage of DCF is its reliance on estimations of future cash flows, which could prove
inaccurate.