Definition of DCF
Discounted Cash Flow. DCF techniques are used to value investments. The cash flows associated with the investment are projected out into the future and discounted back to present day value. In theory, the maximum that an investor would pay for an investment is the present value of the future cash flows that will be received. DCF is useful because it gives an absolute valuation (rather than a valuation relative to other companies). This technique is used for valuing companies, acquisition targets and commercial property. It is also used in project appraisal (you may have come across the term NPV which means net present value - ie present value after deducting the cost of the investment). There are problems with DCF - it is very subjective and very susceptible to the assumptions that you make - particularly to the discount rate and to the growth rate assumed in the continuing period.
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