Discounted Cash Flow Method
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.
DCF Method Overview
Understanding the fundamental concepts behind discounted cash flow valuation
DCF Formula
Business Value =
Present Value of Future Cash Flows
plus
Present Value of Terminal Value
DCF Process Steps
Four-step process for conducting discounted cash flow analysis
Forecast Cash Flow
Project future free cash flows based on business fundamentals and growth expectations
Calculate Discount Rate
Determine appropriate discount rate reflecting business risk and market conditions
Terminal Value
Estimate value beyond explicit forecast period using growth or multiple methods
Present Value
Discount all future cash flows to present value and sum for total business value
Method Evaluation
- Theoretically sound valuation approach
- Reflects business's cash generation ability
- Widely accepted by investors and lenders
- Captures growth and risk factors
- Highly sensitive to assumptions
- Requires reliable financial projections
- Complex terminal value estimation
- Time-intensive analysis process
Complete DCF Analysis Guide
For detailed DCF methodology, step-by-step calculations, and practical examples, see our comprehensive DCF analysis guide.
View Complete DCF GuideReady to Move from Learning to Action?
Put your knowledge to work with professional business valuation services tailored to your specific needs.