Discounted Cash Flow Analysis or “DCF” is a valuation method used in M&A transactions in order to determine the value of a company for sale. This method projects the future free cash flows of the company for sale and then discounts these future cash flows to their present value. Cash flows received farther in the future have less value to the business today and so are discounted more than cash flows that will be received in the near term. DCF analysis is one of the most commonly used valuation methods in M&A. While this method can be very useful in determining the value of a company, it can lead to inaccurate valuations if the underlying inputs of the analysis are unrealistic. In other words, the outputs of a DCF analysis are only as good as the inputs used in it.
