Glossary

Discounted Cash Flow

Last updated 03 June 2008

Description

describes a method of valuing a project, company, or financial asset using the concepts of the time value of money.

Discounted cash flow is also abbreviated to DCF.

All future cash flows are estimated and discounted to give them a present value.

The discount rate used is generally the appropriate cost of capital, and incorporates judgments of the uncertainty (riskiness) of the future cash flows.

The DCF valuation methodology is wholly dependent on the quality and credibility of assumptions within it - assumptions regarding pricing, costs, customer attrition, headcount growth and a multitude of others - all significantly impact the end "cash" number of the model.

The DCF method is both the most difficult to undertake, as well as having the most value from both a strategic planning and forecasting standpoint.