Definition
Discounted Cash Flow (DCF) is a method used to estimate the value of an investment or a company based on the cash it is expected to generate in the future. It considers that money available today is worth more than the same amount received in the future.
Example
A company is expected to generate Rs 1 lakh every year for the next five years. Using the DCF method, these future cash flows are discounted to their present value to estimate the company's current value.
Caution
The DCF method relies on estimates of future cash flows and growth rates. If these assumptions are inaccurate, the estimated value may not reflect the actual worth of the investment. Investors should use DCF along with other valuation methods.