Discounted cash flow (DCF).

In plain English

A discounted cash flow model projects the cash a business is expected to generate for a number of years, then discounts each year back to today using a rate that reflects risk and the time value of money. The projected years are usually followed by a terminal value covering everything after the forecast window. Adding the discounted figures together gives an estimated value for the business. The arithmetic is straightforward; the assumptions are not. Small changes to the growth rate or the discount rate can move the answer dramatically, which is why analysts run ranges rather than a single number.

01Why it matters

It forces every assumption into the open, so when a valuation looks stretched you can see exactly which growth or discount assumption is carrying the weight.

02The math, step by step

A project is expected to produce $100,000 in one year and $100,000 in two years, discounted at 10 percent. $100,000 divided by 1.10 is $90,909. $100,000 divided by 1.21 is $82,645. Together those two years are worth $173,554 today, not $200,000.

Illustrative example. The amounts here are hypothetical, chosen to show how the math works, not real quoted rates or figures.

03What this is NOT

04Receipts

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