Abbreviated as DCF, it is a calculation that takes into account the fact that money has a time value, i.e., money that your company has in the bank today can be invested to earn more money or used to pay down debt and, therefore, avoid interest costs, which can't be done with money that the company won't receive until some future date. Likewise, money that your company will get a year from now is better than money it will get two years from now. Etc. The time value of money also means that, assuming there are no penalties imposed for doing so, the company is better off paying a dollar tomorrow than paying a dollar today.
DCF is calculated by selecting an interest rate—typically a company will use the highest rate that the company reasonably thinks it could earn if it had funds to invest, in which case it is referred to as the internal rate of return (IRR)—and applying that rate in order to discount the flow of cash that will be received or paid out sometime in the future.
Contributed by: Managerwise Staff
See: net present value, internal rate of return