Financial Terms Glossary

DCF - Discounted Cash Flow Analysis

Formal

'Discounted Cash Flow Analysis' - a technique which assesses present and future cash flows, usually from an investment proposal, and applies an 'interest' or 'discount' rate to convert all these differently timed cash flows into a common current value for total project appraisal. Eg $110 in one year's time, at a 10% discount rate (Minimum return (pa%)) is worth $100 in today's terms. A DCF will aggregate a number of these different cash flows into one common document.

Informal

Before the fun...go check the serious definition...it's incomprehensible! If I offered you $1 today... plus $1 next year and $1 for the year after...then how much is that worth today. $3? - well, no, because $3 today would earn interest in the next 2 years that makes it worth more than $3 over the 2 year period. DCF - 'Discounted Cash Flow' - is a technique that converts all these future inflows and outflows to a common 'today' value (using an interest rate) to allow comparisons which exclude the impact of time.

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