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What is Discounted Cash Flow (DCF) analysis?

April 26, 2017analysis Cash flow dcf discounted

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What is Discounted Cash Flow (DCF) analysis?

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Discounted Cash Flow (DCF) analysis is a valuation methodology that involves forecasting future free cash flows for a company and then discounting those free cash flows to the present using a discount rate. Discounting is necessary to account for the risks associated with investing in a particular company as well as the time value of money which can be summarized as “a $1 today is worth more than a $1 tomorrow”. The future free cash flows are commonly calculated by projecting key line items such as Revenue, Direct Cost and Indirect Cost.