DCF Valuation Calculator
DCF valuation is the gold standard for business valuation. Build discounted cash flow models with professional techniques.
How the DCF Valuation Calculator works
Project cash flows, apply discount rates, calculate terminal values, and determine present value. Build institutional-quality DCF models with sensitivity and scenario analysis.
DCF reveals intrinsic value beyond market noise. This calculator creates professional valuations used by investment banks and private equity.
How it works
Tutorial
Many investors struggle with business valuation because they rely on surface-level metrics like revenue or profit without understanding the time value of money. DCF (Discounted Cash Flow) valuation is the gold standard because it calculates a company’s intrinsic value by projecting future cash flows and discounting them back to present value. This method reveals what a business is truly worth regardless of market sentiment or temporary volatility.
Understanding DCF is essential for serious investors, business owners planning exits, and anyone evaluating acquisition opportunities. Unlike simple multiples that just compare to similar companies, DCF forces you to think deeply about cash generation, growth rates, and risk. Investment banks use DCF models to value everything from startups to Fortune 500 companies because it’s grounded in fundamental finance principles rather than market psychology.
The Basic Formula
| Component | Formula | What It Means |
|---|---|---|
| Present Value of Cash Flow | PV = CF₁/(1+r)¹ + CF₂/(1+r)² + … + CFₙ/(1+r)ⁿ | Future cash flows discounted to today’s value |
| Terminal Value | TV = CFₙ × (1 + g) / (r – g) | Value of all cash flows beyond projection period |
| Enterprise Value | EV = PV of Cash Flows + PV of Terminal Value | Total business value before debt adjustments |
| Equity Value | Equity = Enterprise Value – Net Debt | Value available to shareholders |
Step-by-Step Calculation
Example: Software company with $2M annual free cash flow, 15% growth for 5 years, then 3% perpetual growth, 12% discount rate, $500K net debt
Step 1: Project Future Cash Flows
| Year | Calculation | Free Cash Flow |
|---|---|---|
| Year 1 | $2,000,000 × 1.15 | $2,300,000 |
| Year 2 | $2,300,000 × 1.15 | $2,645,000 |
| Year 3 | $2,645,000 × 1.15 | $3,041,750 |
| Year 4 | $3,041,750 × 1.15 | $3,498,013 |
| Year 5 | $3,498,013 × 1.15 | $4,022,714 |
Step 2: Calculate Present Value of Cash Flows
| Year | Cash Flow | Discount Factor (12%) | Present Value |
|---|---|---|---|
| 1 | $2,300,000 | 1/(1.12)¹ = 0.8929 | $2,053,571 |
| 2 | $2,645,000 | 1/(1.12)² = 0.7972 | $2,108,585 |
| 3 | $3,041,750 | 1/(1.12)³ = 0.7118 | $2,165,116 |
| 4 | $3,498,013 | 1/(1.12)⁴ = 0.6355 | $2,223,207 |
| 5 | $4,022,714 | 1/(1.12)⁵ = 0.5674 | $2,282,887 |
| Total PV of Cash Flows | $10,833,366 | ||
Step 3: Calculate Terminal Value and Final Valuation
| Component | Calculation | Result |
|---|---|---|
| Year 6 Cash Flow | $4,022,714 × 1.03 | $4,143,395 |
| Terminal Value | $4,143,395 / (0.12 – 0.03) | $46,037,722 |
| PV of Terminal Value | $46,037,722 × 0.5674 | $26,118,203 |
| Enterprise Value | $10,833,366 + $26,118,203 | $36,951,569 |
| Less: Net Debt | -$500,000 | -$500,000 |
| Equity Value | Final Valuation | $36,451,569 |
What This Means
This software company is worth approximately $36.5 million to equity holders. Notice that over 70% of the value comes from the terminal value—the perpetual cash flows beyond year 5. This is typical in DCF models and shows why assumptions about long-term growth and discount rates matter enormously. A 1% change in discount rate or terminal growth can swing valuation by millions.
The 12% discount rate reflects the risk of these projections not materializing. Higher-risk businesses require higher discount rates, which lower present value. The 15% growth assumption for 5 years is aggressive but justifiable for a software company with strong product-market fit. The 3% perpetual growth roughly matches long-term GDP growth—a standard assumption. If this company’s market price is below $36M, it may be undervalued; above $40M, it’s priced for perfection.
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