Discounted Cash Flow (DCF)

A discounted cash flow valuation prices a business as the sum of all the cash it will ever generate, with each future dollar shrunk back to present value at a discount rate. A dollar arriving in year three at a 10% discount rate is worth $1 / 1.10^3 = $0.75 today; a DCF just runs that arithmetic across every projected year plus a terminal value for everything beyond the forecast window.

The standard build: project free cash flow for 5-10 years, discount each year at WACC, then add a terminal value (usually a perpetuity growth or exit-multiple assumption) discounted back the same way. The terminal value routinely carries 60-80% of the total, which means most of a DCF's answer comes from its least knowable input.

That is the honest limitation: a DCF is a machine for making assumptions explicit, not for producing truth. Shift perpetual growth from 2% to 3% or the discount rate by a point and the output can move 30-50%. Its real value is showing you what the current price implies you must believe.