Valuation and investment
DCF (discounted cash flow)
Valuing a business from the future cash it will generate.
Facts checked against sources onWhat does DCF (discounted cash flow) mean?
A discounted cash flow valuation forecasts a business's future free cash flows, discounts them to today at the cost of capital, and adds them up. It is only as good as its forecasts, so it is usually checked against valuation multiples.
Where does it come up in case interview prep?
Related terms
- Net present value (NPV)Today's value of all future cash flows, minus the upfront investment.
- Free cash flowCash from operations minus capital expenditure.
- Valuation multipleValue as a multiple of a financial measure, based on similar companies.
- Return on investment (ROI)The gain from an investment relative to its cost.
- Payback periodHow long until an investment earns back its cost.
- Time value of moneyMoney today is worth more than the same money later.
- Discount rate and hurdle rateThe rate used to turn future cash into today's value.
- Cost of capital (WACC)The return a company must earn to satisfy its lenders and owners.
Learn it in context
See DCF (discounted cash flow) at work in a lesson from Reading a business through its numbers: the three statements, cash and value, with checks as you go.
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