00
Days
00
Hours
00
Minutes
00
Seconds
How to add £500K in advisory revenue in just 10 hours a week - Register
Register Now!

A Guide to the Discounted Cash Flow DCF

What is a discounted cash flow model (DCF)?

A discounted cash flow model (DCF) is a valuation model that forecasts a company’s cash flows and discounts them to find its current net present value. DCF is widely used in academic research and also applied in real-world settings. The DCF model is a valuation model for companies that estimate their ability to generate future cash flows. This is usually presented in comparison to the company's market value.

Comparing the company to a market-based valuation like a comparable company analysis (CVA), the DCF model emphasizes that value is derived from companies' ability to generate future cash flows in the future for its shareholders.

Types of DCF:

Unlevered DCF approach :

Forecast and discount the operating cash flows. Then, when you have a present value, just add any non-operating assets such as cash and subtract any financing-related liabilities such as debt.

Levered DCF approach:

Forecast and discount the cash flows that remain available to equity shareholders after cash flows to all non-equity claims (i.e. debt) have been removed.


The DCF Formula for Discounted Cash Flow Analysis:

DCF = \frac{CF_1}{(1+r)^1} + \frac{CF_2}{(1+r)^2} + \dotsb +\frac{CF_n}{(1+r)^n}


Although this may seem intimidating a first, we're going to go through each component and break it down for you!

DCF - Discounted Cash Flow

r -  the interest rate or discount rate

n - the period number


Cash Flow (CF):

Cash Flow represents the net cash payments an investor receives for owning given security. When building a financial model of a company, the CF is typically what's known as unlevered free future cash flows. When valuing a bond, the Cash Flow would be interest and or principal payments.

Discount Rate (r)

Discount rates are typically a company's weighted average cost of capital (WACC), which means the rate at which investors expect to be repaid on their investments in the company. For a bond, the discount rate would be equal to the interest rate on the security.

Period Number (n)

Each cash flow is associated with a certain period of time. Common periods are years, quarters, or months. The periods can be equal or different; if they're different, they’re expressed as percentages of 1 year.

What is the Discounted Cash Flow (DCF) Formula Used For in regards to Future Cash Flows?

The discounted cash flow formula is used to determine the value of a business or security. The DCF comprises the present value by discounting future cash flows funds relative to what they will be worth given a required return on investment (the discount rate).

Examples of Uses for the DCF Formula:

  • To evaluate the value of a business
  • To assess the merit of an object for investment purposes to show expected cash flows and future cash flows
  • To determine the marketability of a bond on account of interest rates
  • To calculate the profitability or fair price-per-share ratio when dealing with stocks in a company.
  • To ascertain whether or not there is money to be saved from implementing cost-saving initiatives


What Does the Discounted Cash Flow Formula Tell You?

When assessing a potential investment, it’s important to account for the time value of money or the required rate of return.

The DCF formula takes into account how much return you expect to earn and the resulting value is how much you would be willing to pay for something that offered a rate of return competitive with your expectations.

If you pay less than the DCF value, your rate of return will be higher than the discount rate.

If you pay more than the DCF value, your rate of return will be lower than the discount.

Start your free trial

Let informed predictions and powerful reporting guide your business. Be ahead of the curve with Futrli.

Get business advice here

Our blog holds tips, how to’s and general business advice.

Business

Tangible Asset Management: A Guide for Small Businesses

Discover what tangible assets are and why they matter. Explore strategies for effective asset management, including tracking, valuation & depreciation.

Business

Tangible Asset Management: A Guide for Small Businesses

Discover what tangible assets are and why they matter. Explore strategies for effective asset management, including tracking, valuation & depreciation.

Accountants

How to sell accounting advisory services and add value

Discover how to sell accounting advisory services and add value with strategic insights. Learn practical tips and success stories, and leverage Futrli tools.

Business

Payroll legislation changes 2025: What businesses must know

Stay ahead of 2025 UK payroll legislation changes, including NIC, NMW, SSP & SMP updates. Understand the financial impact and ensure compliance.

Business

Mastering cash flow in Hospitality: A Guide for resilient growth

Learn how to manage cash flow in hospitality, forecast trends, and keep your business financially stable with smarter planning and real-time insights.

Business

Managing construction cash flow for resilience and growth: A comprehensive guide

Cash flow management is the backbone of every construction business. We explore solutions to keep your finances resilient

Business

Best Cash Flow Forecasting Software for Small Businesses

Discover the best cash flow forecasting software for small businesses. Get real-time insights with cashflow forecast tools and simplify financial planning today

Business

Cash flow forecasting: Why it’s critical for SMEs across all industries

Discover why cashflow forecasting is vital for SMEs in industries like construction, retail, and hospitality. Plan ahead and thrive with Futrli’s tools.

Accountants

5 tips on how to train your accountant staff to deliver advisory services

As compliance work becomes increasingly automated, clients seek more value from their accountants. Here’s how to train staff on how to deliver advisory services

Accountants

Why accountants need to embrace advisory (and how to sell it effectively)

Automation and artificial intelligence are transforming accounting. Advisory work is emerging as the next step for accountants looking to stay relevant.

Business

Chancellor Rachel Reeves's first Budget raises taxes on business but softens the blow with targeted support

At Futrli by Sage, we’re here to help you make sense of all things Autumn Budget

Business

Preparing for Big Shifts in 2025: How Futrli Can Help You Handle Rising Wages, National Insurance & Tax Costs

The Autumn Budget has introduced key changes for small businesses, here’s how Futrli can help you manage these budget changes effectively.

Accountants

How Deborah Whitaker from Not Just Numbers Uses Forecasting to Transform Small Businesses

In a recent webinar, Deborah (Debbie) Whitaker, Founder and Director of Not Just Numbers, shared her approach to delivering effective forecasting services.