The Core of Every Serious Valuation
A dollar next year is not worth a dollar today — and a growing stream of future dollars is worth a precise, calculable amount right now. Discounted cash flow (DCF) analysis is how investors, acquirers, and CFOs put a present-day value on future cash: project the flows, discount each one by the required return, and add them up.
This free DCF calculator takes an initial cash flow, a growth rate, a discount rate, and a forecast horizon, then returns the discounted present value with a full year-by-year table showing each cash flow, its discount factor, and its present value — plus the “discount haircut,” the amount time itself erases.
Future cash flows → present value
Please enter a positive initial cash flow, a discount rate above the growth rate, and 1–30 years.
| Discount rate | Total value incl. terminal value |
|---|
This values the explicit forecast period only — a full company valuation would add a terminal value, adjust for net debt and cash, and divide by shares outstanding. Sensitivity to the discount rate is high: small changes move the result a lot.
How to Use This Calculator
- Enter the initial annual cash flow (CF0) — the base-year free cash flow your projection grows from.
- Set the annual growth rate — how fast you expect the cash flow to grow each year.
- Set the discount rate — your required return or cost of capital (it must exceed the growth rate).
- Choose the projection years — the explicit forecast horizon, usually 5–10.
- Click Calculate DCF — read the present value and the yearly breakdown.
The Formula
Each year’s cash flow grows by (1+g)t, then is discounted by 1/(1+r)t. Summing all years gives the present value.
Worked example
CF0 = $100,000, growth 5%, discount 10%, 5 years:
- Year 1: $105,000 ÷ 1.10 = $95,454.55.
- Year 2: $110,250 ÷ 1.21 = $91,115.70.
- Year 3: $115,762.50 ÷ 1.331 = $86,974.08.
- Years 4–5 add $83,020.71 + $79,247.04.
- Total present value = $435,812.08 — the five nominal flows sum to $580,191.28, so discounting erases about $144,379.
Completing the Valuation: Adding the Terminal Value
The example above prices only five years. A business doesn’t vanish in year five, so a full DCF adds a terminal value for everything beyond the horizon — usually with the Gordon growth formula, which treats the final year’s cash flow as growing forever at a modest rate:
- Terminal value = CF5 × (1 + gT) ÷ (r − gT). Using year 5’s cash flow of $127,628.16, a terminal growth of 2% and the same 10% discount rate: TV = 127,628.16 × 1.02 ÷ 0.08 = $1,627,258.99.
- Discount it back like any other year-5 flow: PV of TV = 1,627,258.99 ÷ 1.61051 = $1,010,399.81.
- Full value = $435,812.08 + $1,010,399.81 = $1,446,211.89.
Look at that ratio carefully: the terminal value contributes about 70% of the total. This is completely normal — and it is the main reason DCF fails in careless hands. When seven-tenths of your answer rests on assumptions about the indefinite future, small changes to terminal growth or the discount rate are worth more than years of forecast precision. Professional models often flag exactly this: a terminal share above roughly 70% is a sign to scrutinise the inputs, not to polish them further.
Sensitivity: Why the Answer Is a Range, Not a Number
Hold the worked example’s cash flows fixed (CF0 $100,000, growing 5%) and move only the discount rate:
| Discount rate | Present value of the 5 years | Change vs 10% |
|---|---|---|
| 8% | $459,844.75 | +5.5% |
| 10% | $435,812.08 | base case |
| 12% | $413,705.35 | −5.1% |
| 15% | $383,735.62 | −12.0% |
Now imagine extending the horizon to ten years with a terminal value on top: the same rate shifts widen dramatically, sometimes moving the answer by a third. This is why serious valuations are always presented as scenario bands — bear, base and bull — and why the honest use of this calculator is to spot when a deal only works at one fragile combination of inputs. If the investment clears your bar across the whole band, the margin of safety is real; if it only works at the friendliest settings, the deal is the assumptions, not the business.
Who This Helps and Smart Tips
- Investors valuing a business, project, or income stream before committing capital.
- Founders defending a valuation with math instead of hand-waving.
- Students learning time value of money with visible year-by-year mechanics.
Tips
- The discount rate dominates: a 2-point change can swing the result 20%+ — always sensitivity-test it.
- Keep the growth rate below the discount rate, and terminal growth below long-run GDP growth.
- This values the forecast period only; a full valuation adds a terminal value for everything after year n.
- Garbage in, garbage out: the math is exact, but every input is a judgment call.
- Compare the DCF against the asking price — a positive gap is your margin of safety.
Frequently Asked Questions
What is discounted cash flow in simple terms?
It is a way of figuring out what future money is worth today. Because money can earn returns over time, $1,000 five years from now is worth less than $1,000 now — DCF computes exactly how much less, year by year, and adds it all up.
What discount rate should I use?
Typically the weighted average cost of capital (WACC) for a company, or your required rate of return for a personal investment. Higher risk demands a higher rate. Common starting points: 8–10% for large public companies, 12–20% for private ones.
Why must the discount rate exceed the growth rate?
If growth matched or beat the discount rate, the math implies infinite value — the series never converges. Economically, no cash flow can outgrow its required return forever, so the model requires r > g.
What is terminal value and why isn’t it included?
Terminal value captures all cash flows beyond your explicit forecast, usually via the Gordon growth formula. This calculator values only the forecast years you enter, keeping the mechanics transparent; add a terminal value separately for a complete valuation.
How sensitive is DCF to its assumptions?
Extremely. Small changes in the discount or growth rate compound over the horizon and move the result dramatically. Always run best, base, and worst cases rather than trusting a single number.
Is DCF the same as NPV?
Closely related: NPV is the DCF present value minus the initial investment. If NPV is positive, the investment creates value at your required return; if negative, it destroys value.
Which cash flow should I project — profit, EBITDA or free cash flow?
Free cash flow is the honest input: cash after taxes, working capital and capital expenditure — what could actually be paid out to investors. Net income can be projected only if you strip out its non-cash distortions, and EBITDA overstates value because it pretends assets never need replacing. Rule of thumb: if the number cannot be written on a cheque, it is not the cash flow a DCF should start from.
How should I choose the terminal growth rate?
Keep it at or below long-run nominal GDP growth for the economy the business operates in — commonly 2–3% for mature markets. A terminal rate above the economy’s growth implies the company eventually becomes larger than the economy itself. Also sanity-check your terminal value against an alternative: an EBITDA exit multiple applied to the final year. If the two methods disagree wildly, an assumption is off.
Final Thoughts
DCF won’t predict the future — but it forces your assumptions into the open, where you can stress-test them. Run the base case, then break it: raise the discount rate, cut the growth, and see whether the investment still makes sense.
Build the inputs with our CAGR calculator and compound interest calculator.
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