The term Discounted Cash Flow refers to a valuation method utilized when establishing the future value of an investment, based on the cash flow it is forecasted to generate in the future. The Discounted Cash Flow Analysis is thereby able to highlight the present value (PV) of the cash generated by an investment in the future.
Companies most suitable to the DCF analysis are those in industries such as utilities, oil and gas or banking, hospitality and industries where income, expenditures and growth tend to be relatively stable and steady over time.
How to perform a discounted cash flow analysis?
Formula: DCF = (CF / (1 + r) ^1) + (CF / (1 + r) ^2) + (CF / (1 + r) ^3)+ ….+ (CF / (1 + r) ^n)
CF = Cash Flow
r = Discount Rate
n = number of periods