Discounted Cash Flow Analysis (DCF)

Formal

‘Discounted Cash Flow Analysis’ - a technique which assesses present and future cash flows, usually from an investment proposal, and applies an ‘interest’ or ‘discount’ rate to convert all these differently timed cash flows into a common current value for total project appraisal. For example, $110 in one year’s time, at a 10% discount rate (Minimum return (pa%)) is worth $100 in today’s terms. A DCF will aggregate a number of these different cash flows into one common document.

Real-world Example

An investor values a business by forecasting its cash flows for the next 10 years and discounting them back to today's value using a chosen discount rate - a DCF valuation - to work out what the business is really worth now.