By discounting the cash flows from future dollars into today’s dollars, this method takes into consideration the time value of money. The time value of money says that $1 today is worth more than $1 a year from now.
Discounted cash flows are used in formulas such as net present value that consider the value of projects over several years.
The discount rate used in discounted cash flows is also used in capital budgeting and other valuation methods. This makes discounted cash flows a very good baseline to begin valuing investments and projects. Continue reading