What is Discounted cash flow (DCF)?

Discounted cash flow (DCF) is a way to figure out if something is worth buying by looking at how much money it will make in the future.

Imagine you have a piggy bank, and every year, your favorite toy gives you some coins to put inside. You want to know if this toy is worth buying today, not just based on the first few coins, but all the coins it’ll give you over time. But here's the catch: coins from tomorrow are less valuable than coins today because you could use those coins right away or save them in a different piggy bank.

So DCF helps you turn all those future coins into what they're worth today. It does this by taking each future coin, dividing it by how much money loses value over time (called discount rate), and adding them up.

Let’s say your toy gives you 10 coins every year for the next 5 years, and the discount rate is like a 10% loss in value each year. DCF will calculate what those future coins are worth today, helping you decide if buying the toy now is a good idea.

By using DCF, you're turning the promise of future money into real value today, just like figuring out how many cookies you need to save up for that special toy.