Short definition: Discounted Cash Flow (DCF) is a valuation method used to estimate the value of an investment based on its expected future cash flows.
Explanation: DCF analysis involves projecting a company’s future cash flows and then discounting them back to their present value using a discount rate that reflects the time value of money and the risk associated with the investment. The sum of these discounted cash flows represents the estimated intrinsic value of the investment.
Example: A DCF analysis for a real estate investment would project the expected rental income and potential sale price of the property in the future. These future cash flows would then be discounted back to their present value to determine if the investment is worthwhile.
Additional information (optional): DCF analysis is a widely used valuation method in finance and investing. It is considered a fundamental approach to valuation as it focuses on the underlying cash flows that an investment is expected to generate. However, it is important to note that the accuracy of a DCF analysis depends heavily on the quality of the cash flow projections and the appropriateness of the discount rate.