Financial Analysis
Discounted Cash Flow (DCF)
A valuation method that projects a business's future free cash flows and discounts them to present value using a required rate of return.
A valuation method that estimates the present value of a business by projecting its expected future free cash flows and discounting each period's cash flow back to today using a selected discount rate. The sum of those discounted cash flows, plus a terminal value representing value beyond the projection period, produces an indicated enterprise value. DCF analysis is less common in small business transactions, where valuation multiples applied to SDE or EBITDA are the standard approach, but is sometimes used as a triangulation input alongside multiple-based methods. (Also see: Discount Rate, Terminal Value, Free Cash Flow, Valuation Multiple.)