What is DCF? – Discounted cash flow valuation explained
DCF — Discounted Cash Flow — is one of the best-known income-based valuation methods. The core idea is simple: a business is worth the present value of the cash it is expected to generate, adjusted for time and risk.
Why discount future cash flows?
HUF 100 million received one year from now is not worth the same as HUF 100 million today. Future cash is uncertain and capital has an opportunity cost. Therefore expected future cash flows must be discounted to present value.
The basic logic
Enterprise value = present value of explicit forecast cash flows + present value of terminal value
What is FCFF?
FCFF — Free Cash Flow to Firm — is cash flow available to both debt and equity capital providers.
A common formulation is:
FCFF = EBIT × (1 − tax rate) + D&A − CAPEX − ΔNWC
What is terminal value?
Because it is not practical to forecast every year indefinitely, value beyond the explicit forecast period is summarised in terminal value.
Using a Gordon-growth formulation:
TV = FCFFn+1 / (WACC − g)
where g is long-term sustainable growth. WACC must exceed terminal growth for the formula to make economic sense.
Why can DCF values vary so much?
Because the model is sensitive to assumptions. Small changes in growth, margins or WACC can materially change estimated value. Good valuation therefore uses ranges, scenarios and sensitivity analysis instead of pretending that one number is exact.
What makes a good DCF?
- normalised starting profitability;
- defensible revenue and margin assumptions;
- realistic CAPEX and working-capital needs;
- consistent WACC;
- conservative terminal growth;
- sensitivity analysis;
- clear disclosure of limitations.
GlobalTaxAI approach
GlobalTaxAI uses multi-year historical trends, operating-regime logic and gradual convergence toward sustainable margins, then shows conservative, base and optimistic scenarios.