Discounted Cash Flow

Discounted cash flow (DCF) is a valuation method that estimates what a business, project, or asset is worth today based on the cash it is expected to produce in the future, with each future cash flow reduced to its present value.

DCF = CF1/(1+r)^1 + CF2/(1+r)^2 + ... + CFn/(1+r)^n

CF is the expected cash flow in each period and r is the discount rate. Valuations of whole businesses usually add a terminal value at the end to represent everything beyond the forecast horizon.

A project is expected to produce $50,000, then $60,000, then $70,000 over three years. At a 12% discount rate:

The project's future cash totals $180,000 on paper, and is worth $142,299 today. If it costs less than that to pursue, the numbers say yes.

DCF is precise arithmetic applied to uncertain inputs. Small changes in the growth assumptions or the discount rate move the answer a lot, and the terminal value often accounts for more than half of the total, which means most of the "value" sits in the least knowable years. Treat the output as a range shaped by your assumptions, not a single true number.

DCF values a business or project on the cash it will produce, discounted to today. It is only as good as the cash flow forecast underneath it. That is the practical connection: a DCF built on guessed cash flows is guesswork with decimals. Cash Flow Frog builds the underlying projection from your live accounting data, up to three years rolling, which gives a DCF a forecast grounded in how cash has actually moved rather than a spreadsheet assumption.