Behind the concept of Discounted Cash Flows

Discounted Cash Flow is all about valuing future cash flows from a business and then discounting it by a percentage value to the current value of those future cash flows. The percentage value can be your minimum expected returns or any current safe guaranteed returns from fixed deposits or bonds. If the current value of those future cash flows comes out to be higher than the amount you're going to invest  in the present, then its deemed a safe investment. Now there are three variables in this concept. 

1. First, it is the time frame for which you'll be calculating the future cash flows, 
2. then its the growth percentage which you'll factor in to guess out the future cash flows every year, and 
3. the discount percentage.

These variables are vulnerable to individual's perception about a business and as it is, future can't be correctly stated.

But the question is about the preeminence of  Discounted Cash Flow? Why investors all over the globe fall for this concept? Why value investors kneel before it and swear allegiance to it?

Discounted Cash Flows isn't simply about the guesswork of future cash flows from a business. Existing cash flows from any business go back into the company's Balance Sheet as Cash and Bank Balances, ready to be used for the company's purposes or growth or expansion. They're not meant there to be idle. Over a course of time, these incoming cash flows will be used to fuel growth. These cash flows will become assets for the company in future, Fixed Assets or Working Capital, and will aid in further expansion of business and will lead to increased future cash flows from the business.

So, if one is calculating future cash flows in present, he'll able to calculate cash flows only from the existing business or existing level of business. One'll not be able to gauge the growth in business from the utility of the future cash flows. Now, since future cash flows will get converted into assets for the company, the investor ultimately pays for the future total assets of the company or business which will in turn dole out further future cash flows. Thats why an investor valuing a business using Discounted Cash Flow model pays so much attention to the management antics as the perfect utility of the future cash flows depends upon the will and capacity of the management.

In a way, Discounted Cash Flow is a very strong, potent and conservative way of valuing any business. It really discounts the business for any growth resulting from the ensuing cash flows by sticking to the present condition of the business. If valued appropriately using Discounted Cash Flow model, an investor must reap rich dividends (in both forms).