A valuation method that estimates the value of an investment based on its expected future cash flows, adjusted for the time value of money. Each future cash flow is 'discounted' back to its present value using an appropriate discount rate.
Rooted in the mathematical concept of present value developed in the 17th century, but formalized for corporate finance in the mid-20th century. The term reflects the fundamental principle that money received in the future is worth less than money received today due to opportunity cost and risk.
DCF is like a financial time machine that brings future money back to today's dollars! The magic happens in the discount rate - a 1% change can swing a company's value by billions, which explains why valuations can vary so wildly between analysts.
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