Discounted Cash Flow Calculator
Estimate the intrinsic value of any investment from projected cash flows.
Present Value Breakdown
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Discounted cash flow analysis estimates what an investment is worth based on its expected future cash flows. Here is how to use this calculator:
- Set the discount rate. This is your required rate of return, often the weighted average cost of capital (WACC) for a business. Common values range from 8% to 15%.
- Set the terminal growth rate. This is the assumed long-term growth rate of cash flows beyond the projection period. It should be at or below the long-term GDP growth rate (typically 2-3%).
- Enter projected cash flows. Input your expected annual free cash flows for each year. Use the Add Year button for longer projections. The calculator discounts each flow back to present value.
The calculator computes the present value of all projected cash flows plus a terminal value (using the Gordon Growth Model) to arrive at the estimated intrinsic value.
About DCF Analysis
DCF is one of the most widely used valuation methods in finance. The core idea is simple: an investment is worth the sum of all future cash flows it will generate, discounted back to today's value. This accounts for the time value of money, where a dollar received in the future is worth less than a dollar today.
The terminal value captures all cash flows beyond the explicit projection period and often represents 60-80% of the total DCF value. This is why the terminal growth rate and discount rate assumptions are so important. Small changes in these inputs can dramatically change the output. Always run a sensitivity analysis with different assumptions to understand the range of possible values.
Frequently Asked Questions
What is discounted cash flow analysis?
DCF analysis estimates the value of an investment based on its expected future cash flows, each discounted to present value using a required rate of return. The sum of all discounted cash flows (including a terminal value for flows beyond the projection period) gives the estimated intrinsic value.
What is terminal value?
Terminal value represents all cash flows beyond the explicit projection period. It assumes cash flows grow at a constant rate forever (the terminal growth rate). This calculator uses the Gordon Growth Model: Terminal Value = Last Cash Flow x (1 + g) / (r - g), where g is the growth rate and r is the discount rate.
How do I choose a discount rate?
The discount rate reflects your required rate of return. For businesses, it is often the weighted average cost of capital (WACC). For personal investments, use a rate that reflects the risk of the investment. Higher risk investments should use higher discount rates (12-15%+), while lower risk investments can use lower rates (6-10%).
What are the limitations of DCF?
DCF is highly sensitive to assumptions about future cash flows, discount rate, and terminal growth rate. Small changes in these inputs can produce very different valuations. It also assumes cash flows are predictable, which makes it less reliable for early-stage companies or volatile businesses. Always test multiple scenarios.