In finance, discounted cash flow (DCF) analysis is a method of valuing a project, company, or asset using the concepts of the time value of money. All future cash flows are estimated and discounted by using cost of capital to give their present values (PVs).
Discounted cash flow (DCF) is a valuation method used to estimate the attractiveness of an investment opportunity. DCF analysis uses future free cash flow projections and discounts them to arrive at a present value estimate, which is used to evaluate the potential for investment. If the value arrived at through DCF analysis is higher than the current cost of the investment, the opportunity may be a good one.
Discounted cash flow models are powerful, but they are only as good as their imports. As the axiom goes, "garbage in, garbage out". Small changes in inputs can result in large changes in the estimated value of a company, and every assumption has the potential to erode the estimate's accuracy.