Resources  ❯  Accounting Terms

Discounted Cash Flow

[dis-KOWN-tid kash flo]

What is the definition of Discounted Cash Flow?
A valuation method used to estimate the value of an investment based on its expected future cash flows, adjusted to their present value using a discount rate.
Using Discounted Cash Flow in an Example

In evaluating a potential investment in a new manufacturing plant, the financial analyst uses discounted cash flow analysis to project the future cash flows from the plant operations. These cash flows are then discounted back to their present value at the company's cost of capital rate to determine if the investment will yield a positive net present value.

Using Discounted Cash Flow in a sentence

Our team decided to apply the discounted cash flow method to assess the long-term financial viability of the proposed project.

Related Terms

DDB

A method of accelerated depreciation approved by the Internal Revenue Service (IRS), allowing for twice the rate of annual depreciation compared to the straight-line depreciation method.
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Date of Auditors'/Accountants' Report

The last day on which auditors perform their fieldwork and finalize their evaluation of the company's financial statements, including the review of significant events that occur after the financial statement date.
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Dealer

An entity or individual that buys and sells securities for its own account, acting as a principal in the transaction. Dealers set bid prices for buying securities and ask prices for selling, thus making markets and taking on the associated risks.
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Death Benefit

A payment made under a life insurance contract, paid by reason of the death of the insured, which may include accelerated death benefits paid under certain conditions while the insured is still alive.
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Debenture

A type of debt instrument that is not secured by physical assets or collateral but is backed only by the general creditworthiness and reputation of the issuer.
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Debenture Stock

A type of stock issued under a contract that provides for fixed payments at scheduled intervals, similar to preferred stock, but classified as equity rather than debt in the event of liquidation.
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Debit

In double-entry bookkeeping, a debit is an entry on the left side of an account ledger, indicating an increase in assets or expenses, or a decrease in liabilities or revenue.
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Debit Balance

A balance remaining in an account after one or a series of bookkeeping entries, representing an asset or an expense of the entity.
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Debt

Debt refers to money, notes, bonds, goods, or services owed by one party to another, typically as a result of borrowing funds or acquiring assets.
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Debt Instrument

A financial document representing a loan made by an investor to a borrower, which includes the terms of repayment and, typically, interest payments.
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Debt Retirement

The process of repaying debt, either through periodic payments or a lump sum, effectively extinguishing the financial obligation.
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Debt Security

A financial instrument representing a loan made by an investor to a borrower, typically in the form of bonds, notes, or bills; it is a formal document that evidences the obligation of the borrower to repay the principal along with interest.
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Debt Service Fund

A fund specifically allocated for the accumulation of resources to pay principal and interest on long-term debt. The funds are used to ensure timely debt repayment.
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Debt-to-Equity Ratio

A financial ratio indicating the relative proportion of shareholders' equity and debt used to finance a company's assets. It is calculated by dividing total liabilities by shareholders' equity.
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Debtor

A party, individual, or entity that owes money or other assets to another party, known as a creditor.
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Decedent

An individual who has died.
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Declare

In corporate finance, to declare refers to the act by a company's board of directors to authorize the payment of a dividend on a specified date.
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Declining-Balance Method

An accelerated depreciation method that applies a constant depreciation rate, which is a multiple of the straight-line rate, to the declining book value (carrying value) of a tangible long-lived asset each period.
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Defalcation

The act of misusing or embezzling funds, typically involving the misappropriation of financial assets by a person entrusted with their care.
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Default

The failure to fulfill a financial obligation, such as the timely payment of interest or principal on a debt, or to comply with other terms specified in a contract or agreement.
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Defeasance

The setting aside by a borrower of cash or bonds sufficient to service the borrower's debt, leading to the removal of both the debt and the offsetting assets from the balance sheet. Defeasance can also refer to the annulment of a contract or deed, often through a specific clause that allows for such annulment.
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Deferral

The postponement of the recognition of an expense or revenue in the ledger, where the expense has been paid or incurred, or the revenue has been received, but is recorded in a subsequent accounting period.
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Deferred Charge

A deferred charge is an expense incurred that is accounted for as an asset on a balance sheet until it can be amortized over time, as it provides future economic benefits.
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Deferred Income Taxes

Assets or liabilities that arise from differences in timing or measurement between tax and accounting principles, affecting when taxes are recognized in financial statements.
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Deferred Interest Bond

A bond that does not pay interest until a specified future date or until maturity, instead accumulating interest that is paid together with the principal at a later date.
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Deferred Payment Annuity

An annuity contract that stipulates that payments to the annuitant will commence after a specified number of periods have elapsed.
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Deficiency in Design

A deficiency in design occurs when a control necessary to achieve a specific control objective is either missing or not properly formulated, such that, even if the control operates as intended, the control objective is not consistently met.
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Deficiency in Operation

A deficiency in operation occurs when a control, despite being correctly designed, fails to function as intended, or when the individual responsible for executing the control lacks the necessary authority or qualifications to perform it effectively.
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Deficit

A financial condition that occurs when liabilities exceed assets, or when expenditures surpass income, resulting in a shortage.
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Defined Benefit Plan

A retirement plan sponsored by an employer where employee benefits are computed using a formula that considers factors such as salary history and duration of employment. Employers are typically responsible for contributing to the plan and guaranteeing a specific retirement benefit amount, which is paid as a lifetime annuity to retirees.
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Defined Contribution Plan

A type of retirement plan in which the amount of the employer's annual contribution is specified. Individual accounts are set up for participants and benefits are based on the amounts credited to these accounts through employer contributions and, if applicable, employee contributions plus any investment earnings on the money in the account.
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Deflation

A decline in the prices of goods and services, typically indicating a decrease in the general price level within an economy. It is the opposite of inflation.
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Delaware Statutory Trust

A trust that holds a real property, allowing it to qualify for a 1031 exchange and provide an opportunity for the investor to relinquished management responsibilities.
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Demand Loan

A loan that must be repaid in full either on demand by the lender or within a very short notice period.
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Dependent Care Expenses

Qualified expenses incurred for the care of dependents, such as children or disabled adults, that allow a taxpayer to claim a credit against their tax liability. These expenses must meet specific requirements set by tax regulations and can vary each tax year.
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Depletion

A method of accounting used to allocate the cost of extracting natural resources from the earth and reducing the asset's carrying value in a systematic manner over the period of its extraction.
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Deposit Method

A revenue recognition approach used under certain conditions where revenue and profit are deferred until the completion of a contract, primarily used when the outcome of a contract cannot be reliably estimated.
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Depreciation

A non-cash accounting expense that allocates the cost of acquiring long-term assets over their useful life, representing the asset's wear and tear, obsolescence, or other declines in value over time.
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Derivatives

Financial instruments whose value is derived from the performance of an underlying asset, such as a stock, bond, commodity, currency, or an index like interest rates.
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Detailed Income Statement

A comprehensive financial report that outlines an entity's financial activities and holdings, detailing revenues, expenses, profits, and losses over a specific period.
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Detection Risk

The risk that an auditor will fail to identify a material misstatement in the financial statements.
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Detective Controls

Detective controls are mechanisms and procedures implemented within an organization's internal control system specifically designed to identify and flag errors, fraud, or compliance deviations after they have occurred.
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Direct Labor Costs

Direct labor costs are the total expenses incurred for labor that is directly involved in the production of a product or the delivery of a service, which can be easily and economically traced to an end product.
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Direct Material

A material that is incorporated as a fundamental part of a finished product and can be directly and economically traced to specific units of the product.
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Direct Overhead

Direct overhead refers to the portion of overhead costs that are allocated directly to manufacturing processes, using a standard factor known as a burden rate or overhead application rate.
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Disbursement

The act of paying out money from a fund or account, typically involving payment by cash, check, or electronic transfer.
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Disclaimer of Opinion

A statement issued by an auditor when they are unable to express an opinion on the fairness of the financial statements due to significant limitations on the scope of their audit.
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Disclosure

The process by which a company releases all relevant information pertaining to its business activities, ensuring that the content of financial statements is transparent and understandable to influence informed decision-making by stakeholders.
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Discontinued Operations

A component of a business that has been disposed of, or is classified as held for sale, and represents a separate major line of business or geographical area of operations.
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Discount

A reduction from the full amount or value of an item, including prices or debts, often applied to promote sales, clear inventory, or manage debt repayments.
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Discount Bond

A bond that is sold for less than its face or redemption value.
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Discount Rate

The rate used to calculate the present value of future cash flows or the rate at which interest is reduced when a financial instrument is issued, sold, or lent.
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Discount Yield

The yield on a security that is sold at a discount from its face value, calculated as the investor's return on investment, expressed as a percentage of the face value.
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Discretionary Trust

A type of trust arrangement where the trustee is granted the authority to make investment decisions and manage the trust's assets according to the terms specified in the trust instrument.
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Disposable Income

Personal income remaining after all personal taxes and noncommercial government fees have been paid.
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Dissolution

The process of officially terminating the existence of a corporation, typically involving the cessation of operations, liquidation of assets, and distribution of the remaining assets and liabilities.
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Distribution Expense

Costs incurred by a company related to the marketing, selling, and delivery of goods and services to consumers.
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Distributions

Payments made by a business entity or fund to its owners or shareholders, which may include dividends from earnings, capital gains from the sale of portfolio holdings, or return of capital. These distributions can be in the form of cash, stocks, or other assets, and are often made periodically to distribute profits or realized gains.
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Dividend Payout Ratio

The percentage of earnings paid to shareholders in cash, representing the proportion of a company's profit distributed as dividends to its shareholders.
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Dividends

Dividends are distributions of a corporation's earnings to its shareholders, which can be in the form of cash, other assets, or additional shares of the corporation's stock.
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Dividends Payable

A liability recorded on a company's balance sheet representing the amount of earnings to be distributed to its shareholders.
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Dividends Yield

A financial ratio that indicates the amount of cash dividends received from an investment relative to its market price per share. It is used to measure the current return on investment for a stockholder.
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Dividends in Arrears

Dividends on cumulative preferred stock that have not been paid in the year they were due.
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Documentation Completion Date

The final date by which all audit documentation must be assembled and completed, typically not more than 45 days after the audit report is released.
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Double Taxation

The imposition of two separate taxes on the same earnings, first as the net income of the corporation, and then as the dividends distributed to shareholders.
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Double-Declining-Balance Depreciation Method (DDB)

An accelerated depreciation method approved by the Internal Revenue Service (IRS) that allows depreciation at twice the rate of the straight-line method over the asset's useful life.
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Double-Entry Bookkeeping

A method of recording financial transactions where each transaction is entered in at least two accounts, involving a two-way, self-balancing posting process where the total debits must equal total credits.
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Draft

A written order signed by one party (drawer) instructing another party (drawee) to pay a specified sum to a third party (payee), either on demand (sight draft) or at a fixed future date (time draft).
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Dual Dating

The practice in an auditor's or accountant's report of using two different dates: the original date when the financial audit was completed, and a later date for any subsequent events that materially affect the financial statements and are disclosed in the report.
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Due Date

The specific date by which a task, obligation, or payment must be completed or submitted to avoid penalties such as fines or interest charges.
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Due Diligence

A comprehensive appraisal of a business or individual prior to signing a contract, or an act with a certain standard of care. It can be a legal obligation, but the term more commonly applies to voluntary investigations. In the financial context, due diligence involves the examination and evaluation of a prospective investment or product to confirm all facts, such as reviewing all financial records, plus anything else deemed material.
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Dutch Auction

An auction system in which the price of an item is gradually lowered until it meets a responsive bid and is sold.
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