Discounted cash flow (DCF)

A valuation method that adds up a business's expected future cash flows, shrunk back to today's value.

Definition

A DCF forecasts free cash flow for several years, adds a value for the years beyond, and discounts everything by a rate that reflects risk and the time value of money. The result is an estimate of what the business is worth now.

Watch out for

Small changes in growth or discount-rate assumptions swing the answer a lot. Treat the output as a range, not a precise number.

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