Discounted cash flow

Developed by Oliver Skou Schwarz

This page will refer to the discounted cash flow (DCF) regarding projects and investments. Discounted Cash Flow (DCF) is a method used to estimate the value of an investment or a project by projecting its future cash flows and then discounting them back to their present value. The reason for using DCF is that an investment's value is equal to the sum of its expected future cash flows, discounted at an appropriate rate to account for the time value of money and the investment's level of risk.

Reference test

History

Origin

• Origin of the method
• Why was it "invented"?
• Who "invented" it?

The concept of discounted cash flow (DCF) has been used in various forms for centuries, but the modern version of DCF used in finance and investment analysis can be traced back to the early 20th century.

One of the earliest uses of DCF in its modern form was by Irving Fisher, an American economist, in his 1930 book "The Theory of Interest." Fisher used DCF to calculate the present value of a stream of future cash flows, which he called the "net present value" of an investment.

Fisher's work on DCF was groundbreaking and became an important part of finance theory. Since then, DCF has been widely used in financial analysis and valuation, including in corporate finance, investment banking, and portfolio management.

Use throughout history

How has it been used before?

• In the 1930s, DCF was used by economists such as Irving Fisher and John Maynard Keynes to analyze the impact of interest rates on investments and economic growth.
• In the 1950s, DCF gained popularity in the oil and gas industry as a tool for valuing oil and gas reserves. This was known as the "net present value" (NPV) method, which calculates the present value of expected cash flows from oil and gas reserves.