DCF Calculator – Discounted Cash Flow Valuation Calculator
Calculate investment value using DCF analysis
How to Use
- Enter the initial cash flow amount
- Input the expected annual growth rate (%)
- Enter the discount rate (WACC or required return %)
- Specify the number of years to project
- Input the terminal growth rate for perpetuity
- Calculate to see present value, terminal value, and total enterprise value
What is Discounted Cash Flow (DCF)?
Discounted Cash Flow (DCF) is a valuation method used to estimate the value of an investment based on its expected future cash flows. The method discounts these future cash flows back to their present value using a discount rate, typically the Weighted Average Cost of Capital (WACC) or required rate of return.
DCF analysis is widely used in corporate finance, investment banking, and equity research to value companies, projects, and investment opportunities. It's based on the principle that money available today is worth more than the same amount in the future due to its potential earning capacity.
DCF Formula and Components
The DCF formula consists of two main components:
- Present Value of Projected Cash Flows: Sum of discounted cash flows over the projection period
- Terminal Value: Value of cash flows beyond the projection period, discounted to present value
- Formula: DCF = Σ [CFt / (1 + r)^t] + [TV / (1 + r)^n]
- Where CFt = Cash flow in year t, r = Discount rate, TV = Terminal value, n = Number of years
Key DCF Inputs
| Input | Description | Typical Range |
|---|---|---|
| Initial Cash Flow | Starting free cash flow | $1K - $1B+ |
| Growth Rate | Annual cash flow growth | 3% - 15% |
| Discount Rate (WACC) | Cost of capital | 8% - 12% |
| Projection Period | Years to forecast | 5 - 10 years |
| Terminal Growth | Perpetual growth rate | 2% - 3% |
Note: Terminal growth rate should typically not exceed the long-term GDP growth rate of the economy.
DCF Applications and Limitations
DCF analysis is used for:
- Company valuation for M&A transactions
- Stock valuation and investment decisions
- Capital budgeting and project evaluation
- Real estate investment analysis
- Business plan financial modeling
Limitations include sensitivity to assumptions, difficulty forecasting distant cash flows, and challenges determining appropriate discount rates. Always use DCF alongside other valuation methods for comprehensive analysis.
Frequently Asked Questions
- What discount rate should I use for DCF?
- The discount rate should reflect the risk of the investment. For companies, use WACC (Weighted Average Cost of Capital). For equity investments, use the cost of equity (often calculated using CAPM). Typical ranges are 8-12% for established companies, 15-25% for startups or high-risk investments.
- What's the difference between DCF and NPV?
- DCF (Discounted Cash Flow) is the valuation method, while NPV (Net Present Value) is a specific application. NPV subtracts the initial investment from the DCF value. If NPV > 0, the investment creates value. DCF gives total enterprise value; NPV shows value created above the investment cost.
- How do I determine the terminal growth rate?
- Terminal growth rate represents perpetual growth beyond the projection period. It should be conservative, typically 2-3%, not exceeding long-term GDP growth. Using inflation rate (2-3%) is common. Higher rates imply unrealistic perpetual outperformance of the economy.
- Why is DCF sensitive to assumptions?
- Small changes in growth rate, discount rate, or terminal value can significantly impact valuation. For example, changing discount rate from 10% to 11% might reduce valuation by 10-15%. This is why analysts perform sensitivity analysis and use multiple valuation methods to cross-check results.