Why Discounted Cash Flow?
The DCF method is an approach for valuation, whereby projected future cashflows are discounted at an interest rate (also called: Rate of Return), that reflects the perceived amount of risk of the cash flows. In fact, the discount rate reflects two things: • The time value of money. Any investor would prefer to have cash immediately than having to wait. Therefore investors must be compensated by paying for the delay. • A risk premium that represents the extra return which investors demand, because they want compensation for the risk that the cash flow might not materialize.
