Discounted cash flow (DCF) is a valuation method that estimates the value of an investment using its expected future cash flows. Analysts use DCF to determine the value of an investment today, based on projections of how much money that investment will generate in the future.
- 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.