Discounted Cash Flow (DCF)

Discounted cash flow (DCF) is a financial analysis method used to estimate the value of an investment based on its expected future cash flows. The method involves projecting the future cash flows of an asset and discounting them back to the present using a discount rate, typically representing the cost of capital or required rate of return. DCF is widely used by investors and analysts to determine the fair value of stocks, bonds, or real estate, helping them make informed investment decisions.

Example

An investor uses DCF analysis to determine whether a company’s stock is a good buy by calculating the present value of its projected cash flows over the next five years.