Discounted Cash Flow (DCF)

Discounted Cash Flow (DCF) is a valuation method used to estimate the present value of a business, project, or investment based on its expected future cash flows. It accounts for the time value of money, recognizing that cash received today is worth more than the same amount in the future.

The process involves:

• Projecting future free cash flows over a forecast period.

• Selecting an appropriate discount rate (often the company’s Weighted Average Cost of Capital — WACC).

• Calculating the present value of those future cash flows.

• Adding a terminal value for cash flows beyond the forecast horizon.

DCF is widely used in investment banking, corporate finance, and venture capital for pricing acquisitions, investments, and strategic projects.