Discounted cash flow analysis, which may also be referred to as discounted cash flow method or DCF, is a process which places value on a business, an asset, or even a project.
This method works under the concept of the time value of money, or TVM. This idea assumes that money which is received now is worth more than the same amount received in the future. This is due to the concept of interest generation, which implies that an amount of money has the potential to generate more if it is received earlier.
DCF involves determining, even through an estimate, all future cash flows. By discounting these, their net present value may be computed for. There are various approaches that may be used in order to come up with an appropriate model.
Real estate developers, financial managers, and regular investors may find DCF to be particularly useful, as it helps give an idea of how much benefit may be gained by making a particular investment. If an investor already has an idea of what his objectives are, such as the desired yield and time frame during which this is to be earned, then applying DCF methods will come in handy when deciding on the combination of investments to be made. If, for example, the investor’s objective is to earn a specific amount in order to engage in another business venture in the future, then understanding the time value of returns is crucial. Applying a DCF model to each prospective investment will be helpful in ensuring that the objective is reached.
