Transparent method
The formula
Worked example
Example inputs
How to interpret the result
A DCF valuation is disproportionately sensitive to its terminal-growth-rate and discount-rate assumptions, since the terminal value, everything beyond the explicit projection period, typically represents the majority of the total calculated value, meaning a small change to either assumption can swing the headline valuation substantially.
Before you rely on it
What to check
Stress-test the valuation across a plausible range of discount rates and terminal growth rates rather than trusting a single base-case combination.
The common error
Where people go wrong with discounted cash flow calculator
Presenting a single DCF valuation as a precise, defensible number without disclosing how sensitive it is to the terminal-growth and discount-rate assumptions. A modest change in either one can move the resulting valuation dramatically.
Sensitivity evidence
How next-year free cash flow changes the estimated enterprise value
| Next-year free cash flow | Estimated enterprise value | Discounted terminal value |
|---|---|---|
| $160,000 | $1,956,492 | $1,326,084 |
| $180,000 | $2,201,054 | $1,491,845 |
| $200,000worked example | $2,445,615 | $1,657,605 |
| $220,000 | $2,690,177 | $1,823,366 |
| $240,000 | $2,934,738 | $1,989,126 |
Every input, tested
Which input moves the estimated enterprise value most
| Input | Tested from | To | Estimated enterprise value at each end | Swing |
|---|---|---|---|---|
| Discount rate | 10.0% | 14.0% | $3,162,246 to $1,990,556 | $1,171,690 (48%) |
| Next-year free cash flow | $180,000 | $220,000 | $2,201,054 to $2,690,177 | $489,123 (20%) |
| Terminal growth rate | 2.0% | 4.0% | $2,265,371 to $2,670,921 | $405,550 (17%) |
| Annual cash-flow growth | 4.0% | 6.0% | $2,354,257 to $2,540,240 | $185,983 (7.6%) |
| Explicit forecast years | 4.0 years | 6.0 years | $2,418,180 to $2,471,336 | $53,156 (2.2%) |
Two variables at once
Estimated enterprise value by next-year free cash flow and annual cash-flow growth
| Next-year free cash flow \ Annual cash-flow growth | 3.0% | 5.0% | 7.0% |
|---|---|---|---|
| $160,000 | $1,812,861 | $1,956,492 | $2,110,576 |
| $180,000 | $2,039,468 | $2,201,054 | $2,374,398 |
| $200,000 | $2,266,076 | $2,445,615 | $2,638,220 |
| $220,000 | $2,492,683 | $2,690,177 | $2,902,042 |
| $240,000 | $2,719,291 | $2,934,738 | $3,165,864 |
Step by step
The worked example, input by input
| Input | Value used |
|---|---|
| Next-year free cash flow | $200,000 |
| Annual cash-flow growth | 5.0% |
| Discount rate | 12.0% |
| Explicit forecast years | 5.0 years |
| Terminal growth rate | 3.0% |
| Estimated enterprise value | $2,445,615 |
| Discounted terminal value | $1,657,605 |
Where the inputs come from
Next-year free cash flow is your forecast of cash the business produces after operating costs, taxes and reinvestment. Annual growth applies through the explicit forecast years, the discount rate reflects the risk and cost of capital, and the terminal growth rate is the steady rate after the forecast, which should not exceed long-run economic growth, so 2% to 3% is common. Be conservative on growth and note that the discount rate drives the answer.
When the result stops applying
DCF looks precise but rests on forecasts that are uncertain, and a small change in the discount rate or terminal growth can swing the value by tens of percent. It suits businesses with predictable cash flows and fits poorly for early-stage or cyclical firms. The model excludes debt and cash adjustments, which you must apply to reach equity value.
What to compare it with
Compare with the EBITDA multiple valuation and SDE calculators to see whether the DCF fits the market. The net present value page uses the same discounting for projects, and the present value calculator handles single sums. Document each assumption so you can defend it.
People also ask
Frequently asked questions
Which discount rate suits a business valuation?
Use the cost of capital that reflects the risk of the business. Small private companies often use 12% to 25%, higher than large public firms.
Why is the terminal value so large?
Because it captures all cash flows beyond the forecast period, which are the majority of a business's life. Typically 60% to 80% of the value comes from it.
Is DCF better than a multiple?
It is more detailed but depends on many assumptions. Many analysts use both and see whether they land in the same range.