DEFINITION of 'Discounted Cash Flow  DCF'
A valuation method used to estimate the attractiveness of an investment opportunity. Discounted cash flow (DCF) analysis uses future free cash flow projections and discounts them (most often using the weighted average cost of capital) to arrive at a present value, which is used to evaluate the potential for investment. If the value arrived at through DCF analysis is higher than the current cost of the investment, the opportunity may be a good one.
Calculated as:
Also known as the Discounted Cash Flows Model.
VIDEO
BREAKING DOWN 'Discounted Cash Flow  DCF'
There are many variations when it comes to what you can use for your cash flows and discount rate in a DCF analysis. Despite the complexity of the calculations involved, the purpose of DCF analysis is just to estimate the money you'd receive from an investment and to adjust for the time value of money.
Discounted cash flow models are powerful, but they do have shortcomings. DCF is merely a mechanical valuation tool, which makes it subject to the axiom "garbage in, garbage out". Small changes in inputs can result in large changes in the value of a company. Instead of trying to project the cash flows to infinity, terminal value techniques are often used. A simple annuity is used to estimate the terminal value past 10 years, for example. This is done because it is harder to come to a realistic estimate of the cash flows as time goes on.
How to use DCF to value stock market? Read DCF Valuation: The Stock Market Sanity Check and Using DCF In Biotech Valuation

Cash Flow
The net amount of cash and cashequivalents moving into and out ... 
Weighted Average Cost Of Capital ...
A calculation of a firm's cost of capital in which each category ... 
Internal Rate Of Return  IRR
A metric used in capital budgeting measuring the profitability ... 
Net Present Value  NPV
The difference between the present values of cash inflows and ... 
Equivalent Annual Annuity Approach ...
One of two methods used in capital budgeting to compare mutually ... 
Composite Cost Of Capital
A company's cost to borrow money given the proportional amounts ...

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When and why should the terminal value be discounted?
Typically, an asset's terminal value is added to future cash flow projections and discounted to the present day. Discounting ... Read Full Answer >> 
When evaluating terminal value, should I use the perpetuity growth model or the exit ...
In discounted cash flow (DCF) analysis, neither the perpetuity growth model nor the exit multiple approach is likely to render ... Read Full Answer >> 
What are the drawbacks of using the Dividend Discount Model (DDM) to value a stock?
Drawbacks of using the dividend discount model (DDM) include the difficulty of accurate projections, the fact that it does ... Read Full Answer >> 
What does 100plus accrued interest mean?
The phrase "100plus accrued interest" can be seen in reference to bond valuation and bond quotes. It means a bond has been ... Read Full Answer >> 
What metrics can be used to evaluate companies in the financial services sector?
Two of the best metrics that can be used to evaluate companies in the financial services sector are the pricetobook (P/B) ... Read Full Answer >> 
How do I calculate free, discounted and operational cash flow in Excel?
It's relatively simple and straightforward to calculate free or operating cash flow in Microsoft Excel; each only needs a ... Read Full Answer >> 
What value metrics are best for analyzing companies in the metals and mining sector?
Discounted cash flow (DCF) analysis is often applied to companies in the mining business because accurate evaluation of a ... Read Full Answer >> 
What is the average pricetobook ratio in the railroads sector?
Railroads generally have solid pricetobook, or P/B, ratios a bit above the 2.0 level; these levels are considered "good" ... Read Full Answer >> 
Why would you take DCF into account rather than simply projecting future revenues?
Discounted cash flow, or DCF, analysis is preferred by market analysts for two basic reasons. One, because of the firmly ... Read Full Answer >> 
What industries tend to use discounted cash flow (DCF), and why?
The nature of the calculations used in discounted cash flow, or DCF, analysis make it more properly suited for use in evaluating ... Read Full Answer >> 
What is the difference between intrinsic value and current market value?
There is a significant difference between intrinsic value and market value. Intrinsic value is an estimate of the actual ... Read Full Answer >> 
How do you use DCF for real estate valuation?
Discounted cash flow analysis, or DCF, is very commonly used in evaluation of real estate investments, although determining ... Read Full Answer >> 
How is impairment loss calculated?
Impairment occurs when a business asset suffers a depreciation in fair market value in excess of the book value of the asset ... Read Full Answer >> 
How do I value the shares that I own in a private company?
Share ownership in a private company is usually quite difficult to value due to the absence of a public market for the shares. ... Read Full Answer >>