Discounted cash flow
A transparent framework, not a precision machine.
Discounted cash flow
A discounted cash-flow model estimates value by forecasting future cash flows and discounting them for time and risk.
| Concept | Explanation | |---|---| | Forecast period | Years modeled explicitly. | | Cash-flow forecast | Expected cash generated for capital providers or shareholders. | | Discount rate | Required return reflecting time value and risk. | | Terminal value | Estimated value beyond the explicit forecast period. | | Present value | Future cash converted into today's value. |
Small changes in long-term growth or discount rates can cause large changes in estimated value. DCF is most useful as a transparent framework, not a precision machine.