Discounted Cash Flow (DCF)

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Definition: Discounted Cash Flow (DCF)

It is one of the methods of valuation. It identifies future cash flows- both inflows and outflows and discounts them using a relevant rate to the present value. The cash flow which is obtained after discounting at an appropriate rate is called discounted cash flow. I.e. it takes into account the time value of money.

It is used to value the potential investments, shares, bonds, Company etc. It is also used in Cost-Benefit analysis.

Discounted cash flow analysis is very subjective and can give skewed result at times. Any change in assumptions will change the valuation completely.

Here Cf= Cash Flow

R = rate of discount

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