Discounted Cash Flow Basics

A discounted cash flow model estimates what a business is worth today based on the cash it will produce in the future. It sounds complex, but the core idea is simple. Here is the logic, a worked example and why small changes in assumptions matter so much.

A dollar later is worth less

Money you receive in the future is worth less than money today, because today’s dollar could be invested and grow. At an 8% yearly return, $100 received five years from now is worth about $68 today. Turning future money into today’s value is called discounting.

Discounting is compounding in reverse.

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