Discounted cash flow analysis is a method for introducing time and risk into the analysis of the cash flows from an investment project. That investment project could be a financial investment like a bond or shares of stock or it could be a piece of equipment or a building.
Common sense tells us that cash flows a company anticipates receiving in the future from an investment project are not worth as much right now as their stated future worth because we don't have them now. We have to, somehow, discount them back to the present to see what they are worth to us now. This is called the present value of future cash flows.
On the other hand, if a company invests its cash into a savings or money market account, the value of the cash flows from that investment will increase in the future because of the interest paid on the interest. This is called the future value of cash flows.
Interest rates and time both have an effect on the value of cash flows to a company in the present. This is why companies must use discounted cash flow analysis in order to determine the actual value of cash flows in the present from investment projects.
