Discounted Cash Flow - DCF

Discounted cash flow (DCF) refers to a method of analyzing the potential value of an investment opportunity. Calculating requires estimating future cash flows resulting from a potential investment in order to determine whether the return on the investment will be acceptable. The reason it’s called “discounted” cash flow is that these calculations are performed while taking into consideration that time affects the value of money, so the cash flows are discounted to take into account the effect of time. That way, an investor can estimate what kind of value, in terms of present dollars, to expect from an investment. Discounted cash flow is normally calculated for a specific period of time. One limitation of DCF analysis is that the further out in time you go, the harder it is to estimate the appropriate discount (and so the less accurate the analysis becomes)