The DCF method values businesses based on projected future cash flows discounted to present value. Considered the "gold standard" of business valuation for its theoretical soundness.
Understanding the fundamental concepts behind discounted cash flow valuation
Business Value =
Present Value of Future Cash Flows
plus
Present Value of Terminal Value
Four-step process for conducting discounted cash flow analysis
Project future free cash flows based on business fundamentals and growth expectations
Determine appropriate discount rate reflecting business risk and market conditions
Estimate value beyond explicit forecast period using growth or multiple methods
Discount all future cash flows to present value and sum for total business value
For detailed DCF methodology, step-by-step calculations, and practical examples, see our comprehensive DCF analysis guide.
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