Discounted Cash Flow Analysis

Discounted cash flow (DCF) is a financial model that calculates what an investment is worth today by projecting its future cash flows and adjusting them back to present value using a chosen Discount Rate.

Analysts and investors use DCF to decide whether to invest in a company, security, or project, while business owners and managers rely on it to guide capital budgeting and major spending decisions.

(ChatGPT Explanation¹)

• DCF is just reverse compounding:
  • People often explain DCF in overly technical or abstract terms, but at its core, it’s really just:
    • “If I’m expecting to earn X% per year, how much would I be willing to pay today to receive a certain amount in the future?”That X% is the discount rate — it reflects:
  • The return you could earn elsewhere (opportunity cost),
  • The riskiness of the cash flows,
  • Or your minimum acceptable return.
• So yeah, DCF answers:
  • “What’s the value today of all the money I’ll get later, if I need it to grow at rate r?”