A valuation method that estimates the value of an investment based on its expected future cash flows, adjusted for the time value of money.
The concept of discounted future cash flows (DCF) is a fundamental valuation technique. It posits that the value of an asset is the sum of all its expected future cash flows, brought back to their present value. This is achieved by applying a discount rate, which reflects the riskiness of those future cash flows and the opportunity cost of investing elsewhere. A higher discount rate implies greater risk or a higher required rate of return, leading to a lower present value.