Discounted cash flow
The term ‘discounted cash flow’ (DCF) refers to a technique for valuing a business in terms of its likely cash yields in the future. It is a form of analysis frequently used when purchasing a business. The analysis values the business based on the value of all cash available to investors in the future. It is described as ‘discounted’ since the value of cash in the future is worth less than cash today (because of its reduced capacity for generating a return, such as interest, and because of inflation).
 Calculating discounted cash flow
There are three elements in calculating discounted cash flow:
- The period of time used for the evaluation.
- An accurate estimation of the annual flows of cash that will occur during that time.
- The amount of money that could be earned if it was invested in something else of equivalent risk.
Very broadly, assessing the annual cash flow which is to be discounted involves:
- Using the net income after tax, add on depreciation for the year.
- Subtract the change in working capital from the previous year.
- Subtract the capital expenditures.
Whilst discounted cash flow is a useful tool, it does have drawbacks. In particular, small changes in input values can result in large changes in the value of the company. An accurate valuation using discounted cash flow relies on the owner’s ability to project future cash flow accurately, which can prove difficult. It is also is more suited to long-term investment than short-term investment, and investors should consider other valuations as well as discounted cash flow before making a decision.
However, with recent accounting scandals and inappropriate revenue calculations, discounted cash flow has increased in popularity since it gives investors a more transparent measure for gauging performance and it provides a good picture of the key drivers of share value. It is also a method that is not as likely to be manipulated by aggressive accounting practices and it provides an accurate stock value to investors.
 Related articles on Designing Buildings Wiki.
Featured articles and news
The origins, evolution and future of Level 3 BIM.
For new and returning Urban Design students, check out our article list divided up into the modules you'll be studying.
Report states that health of urban dwellers could be significantly improved by rethinking transport design.
The Kremlin, the centre of Russian power, includes some of the country's finest architecture.
Report launched outlining steps for a national infrastructure system that is efficient, sustainable, and delivers until 2050.
A review of Justin Bere's concise and well-presented introductory guide to Passive House.
This article describes in detail the tender process for a typical commercial construction contract.
What is energy storage, what are the different types and what is its future?
MAD Architects reveal their designs for a state-of-the-art concert hall in Beijing.
Take a look at BIG's designs for two twisting towers in New York City.
'The filing cabinet' which was labelled one of the best British buildings of the 21st century.