Discounted Cash Flow (DCF)

Discounted Cash Flow, or DCF, is simply a future sum of money expressed in today's dollars. A 'cash flow' (CF) is any amount of money moving in or out of a project at some point in time. Because money arriving in the future is worth less than money today, we 'discount' it — that is, we scale it down to its present-day value.

The formula is DCF = CF × DF, where CF is the future cash flow and DF is the discount factor (the shrinking multiplier we calculate as 1 divided by (1 + r) raised to the power n). So you take the raw future amount and multiply it by that factor to get its worth in today's money, often called the 'present value.'

Reading it is straightforward: the DCF result will always be smaller than the original future cash flow (as long as the discount rate is above zero), and the further away or more heavily discounted the money is, the smaller the DCF becomes. This lets you compare amounts of money that arrive at different times on a fair, apples-to-apples basis.

Project managers use DCF when evaluating whether a project is worthwhile. By discounting each year's expected cash flow back to today and adding them up, you can see the true present value of what a project will deliver — which feeds directly into decisions like calculating Net Present Value.