A discounted cash flow (DCF) calculation values a business or investment by forecasting its future free cash flows and discounting each one back to today at a rate that reflects risk, usually the WACC. The sum of those present values, plus a discounted terminal value, is the intrinsic value of the business.
Worked example
Five years of free cash flow of $100, $110, $120, $130 and $140 (in thousands), a 10% discount rate and 3% terminal growth.
- Present value of the five cash flows: $447.7k
- Terminal value in year 5: 140 × 1.03 / (0.10 − 0.03) = $2,060k
- Present value of terminal value: 2,060 / 1.10⁵ = $1,279.1k
- Enterprise value: 447.7 + 1,279.1 = $1,726.8k
The terminal value is 74% of the total, which is typical. Changing terminal growth to 2% gives $1,556k and 4% gives $1,954k, so test a range rather than one number.
The DCF formula
Enterprise Value = Σ (FCF_t / (1 + r)^t) + Terminal Value / (1 + r)^n
Where FCF_t = free cash flow in year t, r = discount rate (WACC), n = forecast years.
Terminal Value (Gordon Growth model (which assumes cash flows grow at a constant rate forever)) = FCF_n × (1 + g) / (r − g)
Where g = terminal growth rate (must be < r).
Discount rate guidance
| Company type | Typical discount rate |
|---|---|
| Public large-cap | 8–10% |
| Public mid-cap | 10–14% |
| Private growth stage | 15–25% |
| Early-stage startup | 25–40% |
| Seed / pre-revenue | 40–60% |
The importance of terminal value
In a 10-year DCF, terminal value often accounts for 70–90% of total enterprise value. This makes the terminal growth rate assumption the single most sensitive variable. Small changes in g (terminal growth) produce large changes in value — always sensitise your model.
DCF limitations
DCF is only as good as your cash flow projections. It is most reliable for: - Stable, mature businesses with predictable cash flows - Businesses you can project 5–10 years with reasonable confidence
It is least reliable for: pre-revenue companies, highly cyclical businesses, and companies where intangible value dominates.
DCF vs NPV
| DCF valuation | NPV | |
|---|---|---|
| Question answered | What is this business worth today? | Does this project create value after its cost? |
| Includes upfront cost | No, result is a value | Yes, subtracted from the present value |
| Terminal value | Usually, 60–90% of the total | Rarely, projects have a finite life |
| Calculator | This page | NPV calculator |
To find the discount rate, use the WACC calculator. To compare a project's return with that rate, use the IRR calculator.
Frequently asked questions
What is a DCF calculator? A DCF calculator discounts projected free cash flows and a terminal value to present value at a chosen discount rate. The total is the intrinsic enterprise value, which you compare with the market price or an offer to judge whether it is cheap or expensive.
What discount rate should I use in a DCF? Use the company's WACC. Large public companies typically land at 8–10%, mid-caps at 10–14%, private growth companies at 15–25% and early-stage startups at 25–40% or more.
What terminal growth rate is reasonable? Use 2–4%, at or below long-run GDP and inflation. The rate must be lower than the discount rate, or the Gordon Growth formula returns no valid value.
How many years should a DCF forecast? Five to ten years. Shorter forecasts push more value into the terminal value, longer ones rely on projections that become less certain with each year.
Is DCF value the same as equity value? No. The result is enterprise value. Subtract net debt (debt minus cash) to get equity value, then divide by shares outstanding for a per-share value.