Discounted Cash Flow Calculator

Understanding Discounted Cash Flow (DCF) Valuation

Discounted Cash Flow (DCF) analysis is a fundamental valuation method used by financial analysts, investors, and corporate leaders to estimate the intrinsic value of an investment or business based on its expected future cash flows.

How Discounted Cash Flow Valuation Works

The core principle of DCF is the time value of money: a dollar received today is worth more than a dollar received in the future due to its earning potential and risk. The DCF process involves three primary steps:

1. Cash Flow Forecasting: Project expected future free cash flows over an explicit period (typically 5 to 10 years).
2. Discounting: Discount each projected cash flow back to present value using the Weighted Average Cost of Capital (WACC) or target discount rate.
3. Terminal Value Estimation: Calculate the residual value of the business beyond the explicit forecast window using either the Perpetual Growth Model or the Exit Multiple Model.

DCF Formula

The Enterprise Value (EV) under a DCF model is expressed as:

$$\text{Enterprise Value} = \sum_{t=1}^{N} \frac{\text{CF}_t}{(1 + r)^t} + \frac{\text{Terminal Value}}{(1 + r)^N}$$

Where $\text{CF}_t$ is the free cash flow in year $t$, $r$ is the discount rate (WACC), and $N$ is the number of forecast years.