DCF Calculator — Discounted Cash Flow

Discounted Cash Flow (DCF) Valuation

DCF is the most fundamental valuation method in finance. The idea is simple: a business is worth the present value of all the cash it will ever generate.

The DCF formula:

Intrinsic Value = Σ [FCFt / (1 + WACC)^t] + Terminal Value / (1 + WACC)^N

Where:

• FCFt = free cash flow in year t
• WACC = weighted average cost of capital (your discount rate)
• N = projection period (typically 5 or 10 years)
• Terminal Value = FCF_N × (1 + g) / (WACC − g) — the Gordon Growth Model

Free Cash Flow (FCF):

FCF = Operating Cash Flow − Capital Expenditures

This is the cash a business generates after maintaining and growing its asset base. It is the cash available to shareholders and debt holders.

Terminal Value:

After the projection period, the business is assumed to grow at a stable terminal rate forever. The terminal value often represents 60–80% of total DCF value — making the terminal growth rate assumption critical. Most analysts use a terminal growth rate close to long-term GDP growth (2–3%).

WACC — the discount rate:

WACC represents the required return that compensates investors for risk. Higher risk = higher WACC = lower valuation. Typical ranges: 8–12% for stable businesses, 12–20% for growth or riskier companies.

Margin of Safety:

Margin of Safety = (Intrinsic Value − Current Price) / Intrinsic Value × 100%

Benjamin Graham recommended buying only when there is a substantial margin of safety (often 20–30% or more). DCF is highly sensitive to assumptions — a margin of safety protects against errors.

Limitations:

DCF is highly sensitive to the WACC and terminal growth rate assumptions. A 1% change in WACC or terminal growth rate can change the result by 30–50%. Always run multiple scenarios (bull, base, bear) rather than trusting a single output.