BUSINESS SPEAK · DCF
DCF: Discounted cash flow
A value built from future cash, converted back to today’s money.
What it means
DCF estimates what a business or investment is worth by forecasting the cash it will produce and dividing each year’s cash by (1 + your required return) for every year you wait.
Where you’ll meet it
- Money later is worth less than money now, because of risk and the return you could earn elsewhere.
- Small changes in growth or discount rate move the answer a lot, so treat DCF as a range, not a price.
Worked example
Scenario: A business will produce 10,000 of cash next year and 10,000 the year after. You want a 10% return.
- Year 1: 10,000 ÷ 1.10 ≈ 9,091
- Year 2: 10,000 ÷ 1.10² ≈ 8,264
- Total: 9,091 + 8,264 = 17,355
Answer: Those two years of cash are worth about 17,355 today.