Discounted cash flow (DCF) analysis tells about the present value of an asset/company, based on the money, which it can make in future. This analysis will estimate the intrinsic value of a company.
Current and future performances of a company are taken into consideration. Both inflow and outflow cash flows are discounted to the present value and sum of all the present values of future cash flows are equal to the net present value.
The categories of discounted cash flow (DCF) are explained below −
Internal forces − Considered as solid data, because raw information (quantitative) is used. Information includes historical performances, current operations and potential.
External forces − Market cycle and competitors' growth are external forces. It is not easy to forecast these forces. One should estimate these forces to make an accurate model.
The advantages of discounted cash flow (DCF) are as follows −
The disadvantages of discounted cash flow (DCF) are as follows −