Updated: April 12, 2022
Discounted cash flow (DCF) is a method used to estimate the value of an investment based on future cash flow. The DCF formula allows you to determine the value of a company today, based on how much money it will likely generate at a future date.
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To do this, DCF finds the present value of future cash flows using a discount rate. Once you have the PV it can then be used to evaluate the investment to see whether it is a wise decision.
Discounted cash flow (DCF) is a method used to estimate the value of an investment based on future cash flow. The DCF formula allows you to determine the value of a company today, based on how much money it will likely generate at a future date.
The formula for DCF is:
DCF = CF1 / 1 + r1 + CF2 / 1 + r2 + CFn / 1 + rn
Where,
CF = Cash Flow in year
r= Discount Rate
n= Number of Periods
Discounted cash flow (DCF) calculates the value of a company based on future cash flows; therefore, all future cash flows must be taken into consideration.
Net Present Value (NPV) calculates the value of the current cash flows the same as DCF; however, NPV goes further by taking inflation into consideration.
The concept behind discounted cash flow is to determine the present value of future cash flows. This calculates how much something is worth right now, rather than looking at its future value.