Discounted cash flow

Discounted cash flow is a valuation approach that estimates an asset's worth as the present value of its expected future cash flows, each discounted at a risk-adjusted rate to reflect the time value of money.

ByHoang TruongUpdated June 30, 2026

FrameworkDCF valuation

See it move

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A project pays €40,000 a year for three years; at a 10% discount rate those flows are worth €36,364, €33,058 and €30,052 today, summing to €99,474. Against a €90,000 outlay, net present value is €9,474 — positive, so the project creates value even after future cash is discounted back to today's terms.

Where it fits

SubjectCorporate FinanceCoreTopicBusiness Valuation & DCFCore

The formula

LaTeX

V = \sum_{t=1}^{n} \frac{CF_t}{(1+r)^t}

Variables

$C F_{t}$: cash flow in period t (€)
$r$: discount rate (required return) (decimal)
$t$: period number
$n$: total number of periods

Each future cash flow is divided by (1 + r)ᵗ to convert it to present value; summing all present values gives the asset's intrinsic worth.

Check yourself

PracticeCORE

A DCF valuation model uses cash flows rather than accounting profit as its inputs. Which of the following best explains why cash flows are preferred?

Select an answer to check your understanding.