Discounted Cash Flow (DCF)
A valuation method that estimates the present value of a business based on its projected future cash flows.
Discounted Cash Flow (DCF) analysis estimates the intrinsic value of a business by projecting its future free cash flows and discounting them back to present value using a discount rate (typically the weighted average cost of capital).
The logic is simple: a dollar received in the future is worth less than a dollar today, because of the time value of money. DCF quantifies this by applying a discount rate that reflects the risk and opportunity cost of the investment.
A standard DCF model has three components: a projection period (typically 5-10 years of detailed cash flow forecasts), a terminal value (representing the value of all cash flows beyond the projection period), and a discount rate (the WACC or required rate of return).
DCF is the most theoretically sound valuation method because it values a company based on what it will actually generate, not what comparable companies are trading at. However, it's also highly sensitive to assumptions — small changes in growth rate, margin, or discount rate can dramatically change the output. This is why scenario analysis is essential in any DCF.
Related Terms
The difference between the present value of cash inflows and outflows — used to evaluate investment decisions.
The blended cost of a company's debt and equity financing, used as the discount rate in valuations.
The discount rate at which the NPV of an investment equals zero — representing its expected annualised return.
The total value of a business including equity and debt, minus cash — used in M&A and valuation multiples.
Further Reading
A founder and CFO guide to financial due diligence — what sophisticated investors examine, common red flags, and how to prepare your business.
Wondering how much your Malaysian startup is worth? Learn how investors value startups, what drives your valuation up or down, and how to negotiate confidently.