Discounted cash flow (DCF) analysis is the standard intrinsic valuation method in corporate finance and investment banking. By projecting future free cash flows, discounting them to present value, and adding a terminal value for cash flows beyond the explicit forecast, you estimate what a business is worth today. This calculator uses the Gordon growth model for terminal value.
How to use this calculator
- Enter Year 1 free cash flow — typically unlevered FCF after taxes and before financing.
- Set the annual FCF growth rate for the explicit projection period.
- Enter the discount rate (usually WACC for enterprise valuation).
- Choose the number of explicit projection years (commonly 5–10).
- Set the perpetual terminal growth rate (typically near long-term GDP growth, 2–3%).
- Review enterprise value and the split between explicit-period PV and terminal value PV.
Formula
Projected FCF_year = FCF_prior × (1 + growth rate). PV of explicit FCFs = Σ [FCF_t / (1 + r)^t]. Terminal value = FCF_final × (1 + g) / (r − g). PV of terminal value = Terminal value / (1 + r)^n. Enterprise value = PV explicit + PV terminal. Discount rate (r) must exceed terminal growth (g).
Example
With $500,000 Year 1 FCF, 8% growth, 12% discount rate, 5-year projection, and 2.5% terminal growth, explicit-period PV and terminal value PV combine into a total enterprise value. Terminal value typically represents 60–80% of total EV — sensitivity-test this assumption.
Frequently asked questions
What discount rate should I use?
For enterprise valuation, use WACC — the weighted average cost of capital. Calculate it with the WACC calculator, then enter the result here. For equity-only projects, use cost of equity.
How do I get from enterprise value to equity value?
Equity value = Enterprise value − Net debt (debt minus cash). This calculator outputs enterprise value only; subtract net debt to reach equity value per share.
Why must the discount rate exceed terminal growth?
The Gordon growth formula divides by (r − g). If g ≥ r, the terminal value is infinite or negative — economically impossible for a perpetuity growing faster than the discount rate.
How sensitive is DCF to terminal value?
Highly sensitive. Small changes in terminal growth or discount rate can swing valuation by 20% or more. Always run sensitivity tables on r and g.