DCF — Intrinsic Value
Discounted Cash Flow — the theoretically 'correct' approach
Discounted Cash Flow (DCF) analysis is the theoretically rigorous way to value any cash-generating asset. The premise: a business is worth the present value of all the cash it will generate in the future, discounted back to today at a rate that reflects the risk and the time value of money. Every other valuation method — multiples, comparables, asset-based — is a shortcut to the same answer.
DCF is what professional investors and corporate finance teams build models around. It's also where most beginners go wrong, because the output is exquisitely sensitive to small changes in input assumptions. \$100 today is worth more than \$100 next year.
You could invest today's \$100 at the risk-free rate (Treasuries) and have ~\$104 next year. So receiving \$100 in one year is equivalent to receiving \$96-97 today (depending on the rate). DCF generalizes this: every dollar of expected future cash flow is 'discounted' back to its present-value equivalent at the discount rate, then summed.
That is the opening. Finishing a lesson is where it stops being interesting and starts being useful: the full lesson runs to 7 sections and ends with 3 practice questions. A free account is what opens the rest, and the other 255 lessons in the Academy with it. No card.
What this lesson covers
- 1The core idea — present value and the time value of money
- 2The DCF process — six steps
- 3Margin of safety — Graham's key principle for DCF use
- 4Mini DCF Builder — see how assumptions drive value
- 5A worked DCF example — simple-case Apple intrinsic value
- 6Where to see this on the platform
- 7Summary