Discounted Cash Flow (DCF)

Cash is the fundamental benefit to engaging in any business activity and the cash generated from the business would typically represent the worth of the business. The most common approach used to do this is the Discounted Cash Flow (DCF) method which the sum of the present value of future cash flows generated from the business. In order to do a DCF valuation, the anticipated future cash flows from the business would need to estimated over the expected life of the business and would need to be discounted by a applying a suitable discount rate to the stream of cash flows. The sum of all the discounted cash flows which in other words is the total present value of future cash flows would be the value of the business. The formula below is a basic one used to do this:

DCF = CF1/(1+d)t + CF2/(1+d)t+1 CF3/(1+d)t+3……..+ CFn/(1+d)t+n

CF = cash flow and 1 means period 1, 2 means period 2
n = the total number of years (i.e. the life of the business)
d = discount rate
t = time or the year to which the cash flow relates