DCF Model: Everything you need to know about the discounted Cash Flow
Written by Mariyam Sara
3 min read | Updated on October 09, 2025, 17:52 IST
What is the DCF Model?
How does DCF work?
Discounted Cash Flow formula
How to calculate WACC (Weighted average cost of capital)
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Discounted Cash Flow is a method of finding the valuation of companies, stocks, bonds, long-term investments, and equipment. It helps investors and companies find out if the investment they’re about to make is profitable or not.
In this blog, you will understand what the DCF model is, how it works, and how it’s calculated.
What is the DCF Model?
DCF is a valuation method used to find out the present value of return on investment by discounting its predicted future cash flows. Time value of money is a crucial component of the DCF model, as the ₹1 you hold today is of more value than that in the future. This is because the money you have today can be invested and can generate returns on but tomorrow’s money cannot.
How does DCF work?
Here’s how the Discounted Cash Flow model works,
Find Estimated Future Cash Flows
Determine the future cash flows expected from the investment made.
Choose a discount rate
Select an appropriate discount rate that represents the cost of capital or returns from alternative investments. You will discount the future cash flow by this rate.
Calculate the present value of the cash flow
This is the crucial stage where you will find out the present value of future cash flows. For example, the investment will provide a future cash flow of ₹50,000, so what is the value of that ₹50,000 today?
Discounted Cash Flow formula
DCF = [Cash flow from 1st year / (1+r)^1] + [Cash flow for 2nd year / (1+r)^2] + [Cashflow for the 3rd year / (1+r)^3] +... + [Cash flow for the nth year / (1+r)^n]
Let’s understand the DCF formula using an example,
Suppose Company A is planning to invest in a road-building project of ₹5 Lakh for a tenure of 5 years. Let’s take the Weighted average cost of capital as 6%.
The following are the estimated future cash flows.
| Year | Cash Flow |
|---|---|
| 1 | ₹10,000 |
| 2 | ₹15,000 |
| 3 | ₹20,000 |
| 4 | ₹25,000 |
| 5 | ₹30,000 |
Now put the values in the DCF formula,
DCF = [10,000 / (1+0.06)] + [15,000 / (1+0.06)^2] + [20,000 / (1+0.06)^3] + [25,000 / (1+0.06)^4 + [30,000 /(1+0.06)^5]
| Year | Cash Flow | Discounted Cash Flow |
|---|---|---|
| 1 | ₹10,000 | ₹9,434 |
| 2 | ₹15,000 | ₹3,350 |
| 3 | ₹20,000 | ₹16,792 |
| 4 | ₹25,000 | ₹19,802 |
| 5 | ₹30,000 | ₹22,419 |
| Total | ₹81,797 |
The total present value of the expected future cash flows is ₹81.797.
Let's find the Net Present Value.
Net Present Value (NPV) = (Present value of future cash flows) - (Initial investment)
= ₹81,797 - ₹5,00,000
= - ₹4,18,203
Since the NPV is negative, meaning Company A will face a loss if it invests in the road-building project.
How to calculate WACC (Weighted average cost of capital)
You need to calculate the weighted average cost of capital before finding the DCF. WACC is the average rate of return investors expect from a firm for financing its assets. It includes the cost of equity and the cost of debt, I.e, interest rate.
WACC = (E / V X Re) + [D / V x Rd x (1-Tc)]
For example, Company B has shareholder equity of ₹30 Lakh with a debt of ₹10 Lakh for a fiscal year. So the market value of Company B’s financing is ₹40 Lakhs. The cost of equity (Re) is 4.5% and the cost of debt (Rd) of a firm is 5% with a corporate tax of 10%.
WACC = (30 / 40 x 4.5%) + (10 / 40 x 5%) x (1 + 10%)
= 3.375%+1.375%
=4.75%
Therefore, shareholders of Company B will be receiving an average of 4.75% every year for financing its assets.
DCF is a powerful valuation tool used by analysts, but its important to remember that its prediction may not always be right. To understand concepts like DCF in detail, sign up on UpLearn by Upstox today and become a smart investor.
About Author
Mariyam Sara
Sub-Editor
holds an MBA in Finance and is a true Finance Fanatic. She writes extensively on all things finance whether it’s stock trading, personal finance, or insurance, chances are she’s covered it. When she’s not writing, she’s busy pursuing NISM certifications, experimenting with new baking recipes.
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