Discounted Cash Flow Model

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Discounted cash flow model (DCF) is a valuation technique used to estimate the potential of an investment opportunity or a company. DCF values a company or the investment by forecasting its future cash flows and after that using the Net Present Value (NPV) method DCF value those cash flows.
In a DCF analysis, the cash flows are calculated by using a series of assumptions on how the business will perform in the future under various parameters and then translates the business performance into the cash flow —which is one of the important things any investors would be worried about.
Why to use Discounted Cash Flow
DCF can be used in many scenarios as it tries to measure the value created by a business directly and precisely. DCF is probably one of the most widely used valuation technique, because of its theoretical foundations and its ability which can be used in almost all scenarios. DCF is used by Investment Bankers, Business Development professionals, Internal Corporate Finance, and Academics.
Though, DCF still carries some risks as well.  The valuation accomplished is very sensitive because it is based on lot of assumptions and forecasts, therefore it can vary as well. For e.g. if one key assumption is slightly deviating, it can lead to a totally different valuation which means if the assumptions go wrong; the valuations can also go wrong.


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