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The discounted cash flow (DCF) analysis, in financial analysis, is a method used to value a security, project, company, or asset, that incorporates the time value of money. Discounted cash flow analysis is widely used in investment finance, real estate development , corporate financial management, and patent valuation .
Project Appraisal Using Discounted Cash Flow; T. Keck, E. Levengood, and A. Longfield (1998). Using Discounted Cash Flow Analysis in an International Setting: A Survey of Issues in Modeling the Cost of Capital, Journal of Applied Corporate Finance, Fall, pp. 82–99. Eric Kirzner (2006) Selected Moments in the History of Discounted Present Value.
Discounted cash flow, or DCF, is a tool for analyzing financial investments based on their likely future cash flow. When an investment will cost more money to buy, generate less money in return ...
For a valuation using the discounted cash flow method, one first estimates the future cash flows from the investment and then estimates a reasonable discount rate after considering the riskiness of those cash flows and interest rates in the capital markets. Next, one makes a calculation to compute the present value of the future cash flows.
This approach often involves discounted cash flow analysis, where future cash flows are projected and discounted back to their present value, providing a clearer picture of an asset’s worth.
The converse process in discounted cash flow (DCF) analysis takes a sequence of cash flows and a price as input and as output the discount rate, or internal rate of return (IRR) which would yield the given price as NPV. This rate, called the yield, is widely used in bond trading.
It is most often used in multi-stage discounted cash flow analysis, and allows for the limitation of cash flow projections to a several-year period; see Forecast period (finance). Forecasting results beyond such a period is impractical and exposes such projections to a variety of risks limiting their validity, primarily the great uncertainty ...
Discounted cash flow valuation Gordon model John Burr Williams (November 27, 1900 – September 15, 1989) was an American economist , recognized as an important figure in the field of fundamental analysis , and for his analysis of stock prices as reflecting their " intrinsic value ".