Discounted cash flow (DCF) is a valuation method that estimates the present value of an investment based on its expected future cash flows, discounted at a specific rate.

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Why is discounted cash flow (DCF) important?

Discounted cash flow (DCF) is important because it provides a more accurate valuation of an investment by considering the time value of money and future cash flows.

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An easy way to understand discounted cash flow (DCF) is:

To think of it as estimating the value of an investment based on how much money it's expected to generate in the future, while considering the time value of money.

How Do You Calculate Discounted Cash Flow (DCF)

DCF is calculated by estimating future cash flows and discounting them to present value using a discount rate that reflects the risk of the investment.

DCF Formula: Present Value = (Cash Flow 1 ÷ (1 + r)^1) + (Cash Flow 2 ÷ (1 + r)^2) + ... + (Cash Flow n ÷ (1 + r)^n)

Using the Discounted Cash Flow (DCF) method, we assessed long-term investments critically, ensuring they aligned with our strategic goals. This analysis was crucial in deciding to upgrade our facilities, ensuring that each investment would generate positive returns over time, enhancing overall profitability.