What Is a Discounted Cash Flow Model?

Discounted Cashflow Model (DCF model for short) is one of the most widely used pricing models in corporate finance and investment science. It plays a huge role in both academic and practical fields.

Discounted cash flow model

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Discounted Cashflow Model

The formula of the discounted cash flow model can be expressed as follows:

P ₀ = (E ₀ CF ₁ ) / (1 + r) + (E ₀ CF ₂ ) / (1 + r) ² + ... (continues to indefinite period)

Where P ₀ represents a certain enterprise, asset or project.

The calculation method of the discounted cash flow model is simple, but many problems are involved in practical application. First, predict the future indefinitely

In view of the many limitations of the discounted cash flow model, financial professionals often supplement it with multiplier pricing models, asset replacement cost pricing models, residual income models, and abnormal return growth models. The discounted dividend model can be regarded as a special form of discounted cash flow model.