- Discounted Cash Flow (DCF): a valuation method that estimates value by forecasting future cash flows and discounting them back to today.
Core idea:
- future cash flows are worth less than current cash flows
- the discounting uses a required return, explained in Discount Rate
DCF is built on the same logic as PV & NPV:
- value rises if future cash flows are higher
- value falls if the discount rate is higher
In practice, DCF is commonly used to value businesses, projects, and individual assets.