If you want to find out how much a business or investment is really worth today, even if the cash comes in years from now — you’re looking for Discounted Cash Flow (DCF).
DCF is a core valuation method used by investors, analysts, and business owners to estimate the present value of future money.
Let’s break it down in simple terms — with examples, a calculator, and a visual guide.
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🙋♀️ What is Discounted Cash Flow?
DCF is a way to calculate how much a stream of future cash flows is worth in today’s dollars.
Why? Because money today is worth more than money tomorrow (thanks to inflation, risk, and opportunity cost).
🧮 DCF Formula
The basic DCF formula is:
DCF = CF₁ / (1 + r)¹ + CF₂ / (1 + r)² + … + CFₙ / (1 + r)ⁿ
Where:
- CF₁, CF₂, … CFₙ = Expected future cash flows
- r = Discount rate (your required rate of return)
- n = Year number
💵 Example
Let’s say you expect to earn these cash flows:
- Year 1: $5,000
- Year 2: $6,000
- Year 3: $7,000
And your discount rate is 10% (0.10)
The DCF is:
DCF = 5,000 / (1 + 0.10)^1
+ 6,000 / (1 + 0.10)^2
+ 7,000 / (1 + 0.10)^3= 4,545.45 + 4,958.68 + 5,257.77
= $14,761.90
That means the value of these future cash flows today is about $14,761.90
✨ Why Use DCF?
- To estimate what an investment is truly worth today
- To decide whether a project or asset is worth your money
- To compare different investment opportunities
It’s widely used in stock analysis, real estate, startups, and corporate finance.