What is DCF?

DCF stands for Discounted Cash Flow. It is a financial valuation method used to estimate the value of an
investment or a company by forecasting its future cash flows and discounting them back to their present
value. The underlying principle of DCF is that the value of money decreases over time due to factors like
inflation and the opportunity cost of using money in one investment rather than another.

In DCF analysis, cash flows expected to be generated by the investment or company are projected into
the future, typically over a specific time horizon. These cash flows can include revenues, operating
expenses, taxes, and capital expenditures. Once the projected cash flows are determined, they are
adjusted to their present value by discounting them using an appropriate discount rate, which accounts
for the time value of money and the risk associated with the investment.

The formula for calculating the present value of future cash flows using DCF is:

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

Where:
PV = Present Value
CF = Cash Flow in each period (1, 2, ..., n)
r = Discount rate

By discounting the future cash flows, DCF provides a way to assess the attractiveness of an investment
or determine the intrinsic value of a company. If the present value of the cash flows is higher than the
initial investment or market value of the company, the investment may be considered undervalued or
attractive. Conversely, if the present value is lower, it may indicate an overvalued investment.

DCF analysis is widely used in corporate finance, investment banking, and equity research to evaluate
potential investments, mergers and acquisitions, and determine the fair value of stocks or companies.
However, it's important to note that DCF analysis relies heavily on assumptions about future cash flows,
growth rates, and discount rates, and therefore, it's subject to inherent uncertainties and limitations.