Discounted cash flow

Valuing an asset as the money it will produce, with each future amount reduced to reflect that money arriving later is worth less than money arriving now.

Example

Five forecast years worth 4,383,145 today, plus a terminal value worth 11,545,007 today, gives an enterprise value of 15,928,152.

Important

Its value is not the number it produces but the record it leaves of what you believed. Used to generate a single figure, it has thrown away the useful half and kept the unreliable one.

Related terms

• Discount rate — The annual rate at which future money is reduced to a present value, reflecting both the time you wait and the risk that the money does not arrive.
• Terminal value — The value assigned to everything beyond the explicit forecast period, most often by assuming the final forecast year's cash grows at a constant rate forever.
• Present value — What an amount of money arriving in the future is worth today, once discounted at a chosen rate.

Lessons that explain it

• Discounted cash flow: the method that shows its assumptions — A discounted cash flow states every assumption out loud, which is its great virtue and the reason it is so easy to abuse. The output moves enormously on inputs that cannot be observed. (14 min)

All 578 terms in the Investing glossary