Discounted cash flow (DCF)

Discounted cash flow analysis values an asset, most often a company or project, by projecting the cash flows it is expected to generate in the future and converting them into a single present-day value. The core idea is that a dollar received in the future is worth less than a dollar today, both because of the time value of money and because future cash flows are uncertain.

Each projected future cash flow is divided by (1 + r)^t, where r is a discount rate reflecting the riskiness of those cash flows and t is the number of periods until they are received, and the resulting present values are summed; cash flows beyond the explicit projection period are typically captured in a terminal value. The discount rate is the model's most consequential input and is closely related to the internal rate of return a project would need to clear to be worthwhile.

DCF is a core tool of fundamental analysis, used in equity valuation, project appraisal, and pricing private transactions where no observable market price exists. Its central weakness is sensitivity to assumptions: small changes in the growth rate, discount rate, or terminal value assumptions can swing the resulting valuation dramatically, which is why DCF outputs are usually presented as a range or cross-checked against simpler relative measures like the price-to-earnings ratio or EBITDA multiples.