How does discounted cash flow valuation work?

Discounted cash flow (DCF) valuation is a financial model used to estimate the value of an investment based on its expected future cash flows. It involves projecting the cash flows that the asset will generate over a specific period and then discounting those cash flows back to their present value using a discount rate, which reflects the risk and opportunity cost of capital. The sum of these discounted cash flows, along with any terminal value at the end of the projection period, gives the total estimated value of the investment. This method helps investors assess whether an asset is undervalued or overvalued compared to its current market price.