Discounted cash flow (DCF) is a method used to value a security, project, company, or asset, that incorporates the time value of money. It is a financial model that estimates the value of an investment based on predicted future cash flows. The DCF analysis attempts to forecast the expected cash flows from the investment, select a discount rate, and discount the forecasted cash flows back to the present day. The formula for DCF is DCF=(1+r)1CF1+(1+r)2CF2+(1+r)nCFn, where CF1 is the cash flow for year one, CF2 is the cash flow for year two, CFn is the cash flow for additional years, and r is the discount rate.

DCF analysis is widely used in investment finance, real estate, and private equity. It is used to determine if an investment is worthwhile in the long run, and it is also used to value mature companies in stable industry sectors, such as utilities. DCF valuation is used in investment banking to determine if a potential merger or acquisition is worth it.

DCF analysis has some limitations. It is very sensitive to the estimation of the cash flows, terminal value, and discount rate. A large amount of assumptions needs to be made to forecast future performance. However, one of the major advantages of DCF is that it can be applied to a wide variety of companies, projects, and many other investments, as long as their future cash flows can be estimated.

In summary, DCF is a financial model used to estimate the value of an investment based on predicted future cash flows. It is widely used in investment finance, real estate, and private equity to determine if an investment is worthwhile in the long run. While it has some limitations, it can be applied to a wide variety of investments as long as their future cash flows can be estimated.