Discounted Cash Flow Definition

A Discounted Cash Flow or DCF is one of the most important methods used to value a company. A DCF is carried out by estimating the total value of all future cash flows (both inflowing and outflowing), and then discounting them (usually using Weighted Average Cost of Capital – WACC) to find a present value of that cash. The aim of a discounted cash flow is to estimate the total amount of cash you will receive from an investment, and if this value is higher than the cost of the investment, it is usually worth doing. The process behind creating a DCF model is as follows:

  • Project Future Cash Flows - this is usually done from a 3-statement projection model or by using simple assumptions about Revenue, Tax, Depreciation, Amortization etc and calculating free cash flow from there
  • Calculate the Discount Rate - this is either taken to be a simple percentage or is calculated using WACC
  • Discount Future Cash Flows - either by using the Mid-Year discount or a simple discount period, it is fairly simple to calculate the present value of future cash flows
  • Estimate Terminal Value - Terminal Value is then estimated either by using a terminal exit multiple (usually an EBITDA multiple) or with a Terminal Growth Rate (Gordon Growth Method)
  • Find the Net Present Value - to find the net present value simply discount the terminal value (again using WACC or a simple %) and then add that to the sum of the discounted cash flow values

 

To learn more about this concept and become a master at DCF modeling, you should check out our DCF Modeling Course. Learn more here. 

Learn More Here

Related Terms

Return to the Finance Dictionary Read Forum Topics About Discounted Cash Flow

 

 

Start Discussion

Popular Content See all

Chose Evercore over GS & MS for Full Time - Did I make the right choice?
+31IBby Prospective Monkey in Investment Banking - Mergers and Acquisitions">Prospect in IB-M&A
Meeting Girls Right Now?
+19OFFby Vice President in Investment Banking - Generalist">VP in IB - Gen
Worst Mistake you've ever made in an interview? Can it beat mine
+16IBby Intern in Investment Banking - Generalist">Intern in IB - Gen
Dating in IB
+14IBby Intern in Investment Banking - Generalist">Intern in IB - Gen
Is it worth leaving banking if I have it pretty good already
+12IBby 1st Year Analyst in Investment Banking - Industry/Coverage">Analyst 1 in IB - Ind

Total Avg Compensation

October 2020 Investment Banking

  • Director/MD (18) $713
  • Vice President (51) $332
  • Associates (266) $228
  • 3rd+ Year Analyst (38) $163
  • 2nd Year Analyst (148) $159
  • Intern/Summer Associate (137) $141
  • 1st Year Analyst (587) $130
  • Intern/Summer Analyst (562) $82

Leaderboard See all

1
LonLonMilk's picture
LonLonMilk
98.4
2
Jamoldo's picture
Jamoldo
98.3
3
Secyh62's picture
Secyh62
98.2
4
CompBanker's picture
CompBanker
97.9
5
redever's picture
redever
97.7
6
Addinator's picture
Addinator
97.6
7
bolo up's picture
bolo up
97.5
8
NuckFuts's picture
NuckFuts
97.5
9
frgna's picture
frgna
97.5
10
Edifice's picture
Edifice
97.3