Discounted Cash Flow
A technique used to present a forecasted stream of future cash flows in conditions of its present value, or its value in today's dollars. Discounted cash flow is the fundamental principle underlying business valuations and is used for several purposes:
- To determine the price of a partnership interest in a buyout contract
- To calculate the expected future advantages to investors in either debt obligations or equity interests
- To value debt obligations for debt/equity swaps
- To value minority benefit
- To designate the value of partial interests in an entrepreneurial industry for divorce settlements
- To assess estate taxes
Many valuation techniques are used by analysts, investors, appraisers, the IRS, and another, most of which employ discounted cash flow as the primary tool. For certain kinds of companies, such as hotels and other real-estate based businesses, the internal rate of return technique can efficiently calculate the discount rate to be used in discounted cash flow analyses.