Discounted cash flow analysis is a method of valuing a security, project, company or asset using the concepts of the time value of money.

The first assumption made when using DCF is that a dollar today is worth more than a dollar tomorrow; therefore, we must discount each future stream of income back to its present value before adding them together and dividing by our projection period length (usually 3-5 years).

Examples include investment finance, real estate development and corporate financial management. It was also used in industry as early as 17s or 18s and became widely used in U.S. courts in 198s and 199s.

Discounted Cash Flow.

First, we must forecast all expected free cash flows for each year in our projection period (usually 3-5 years). Then we discount these expected free cash streams back to their present values using an appropriate discount rate. Finally, add up all of these present values and divide by our total number of years in our projection period (3-5) which gives us our final answer - our estimated intrinsic value per share!

Discounted cash flow analysis works by discounting all future cash flows by using cost of capital to give their present values (PVs). The sum of all future cash flows, both incoming and outgoing, is the net present value (NPV), which is taken as the value of the cash flows in question.

We can use either cost of capital or WACC as an appropriate discount rate

Discounted cash flow analysis was first introduced around 196s-198s but it wasn't until 198 that it started being widely used in U.S courts for patent valuation purposes.