Discounted cash flow (DCF) and net present value (NPV)
- Why use it? Discounted cash flow is a method to assess and compare the current and future value of an asset. Discounted cash flows (DCF) are calculated to assess the future cash flows that could come from an investment opportunity.
- What does it do? The DCF method is an approach to valuation, whereby projected future cash flows are discounted at an interest rate that reflects the perceived risk of the cash flows. The interest rate is reflected by the time value of money (investors could have invested in other opportunities), and a risk premium.
- When to use it? DCF (and NPV) is used for capital budgeting or investment decisions.
- What questions will it help you answer? Which investment ...
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