Discounted Cash Flow Calculator

What discounted cash flow analysis means

A discounted cash flow (DCF) analysis values an asset by the cash it is expected to produce. Each future payment is shrunk by a discount rate, because a dollar that arrives in five years is worth less than a dollar you hold today: the dollar in hand can be invested, it is not exposed to the risk that the payment never comes, and it is not eroded by years of inflation.

Add up all the shrunken payments and you get one number, the estimated worth of the asset right now. Analysts use the method to value whole companies, individual shares (starting from earnings or free cash flow per share), rental property, and proposed business projects. If the estimate is higher than the asking price, the asset looks cheap on your assumptions; if it is lower, it looks expensive.

This calculator uses a two-stage model. First comes a period of faster growth, then a period of slower growth called the terminal stage. Splitting the forecast in two reflects how most businesses behave: rapid expansion tends to fade as markets mature.

How to use the calculator

Fill in the six fields and press Calculate:

• Current value: the cash flow you start from, in dollars (earnings, free cash flow, rent, or any yearly amount). It must be at least 1.
• Discount rate: the yearly return you demand for taking this risk, in percent. The cost of capital (see the WACC calculator) is a common choice.
• Growth rate and Growing over: how fast the cash flow grows each year during the first stage, and for how many years.
• Terminal rate and Terminal rate over: the slower yearly growth that follows, and how many years it lasts.

You get three results: the discounted value of the growth stage, the discounted value of the terminal stage, and their total. Both stage lengths must be whole numbers of years, and none of the rates can be negative.

The year-one cash flow is the current value grown by one year of growth, and every cash flow is assumed to arrive at the end of its year.

The two-stage DCF formula

Let V be the current value, d the discount rate, g the growth rate for n years, and τ the terminal rate for m further years (all rates written as decimals, so 5% is 0.05). During the growth stage the cash flow in year t is V(1 + g)^t, and it is discounted by dividing by (1 + d)^t.

PV growth = Σ (t = 1 to n) of V × (1 + g)^t ÷ (1 + d)^t

The terminal stage picks up where the growth stage ended: the cash flow in year n + k is V(1 + g)ⁿ(1 + τ)^k, discounted by (1 + d)^{n + k}.

PV terminal = Σ (k = 1 to m) of V × (1 + g)ⁿ × (1 + τ)^k ÷ (1 + d)^{n + k}

Each sum is a geometric series, so the calculator uses the closed form. With q = (1 + g) ÷ (1 + d), the growth stage is worth V × q × (1 − qⁿ) ÷ (1 − q). The terminal stage has the same shape with q replaced by (1 + τ) ÷ (1 + d) and an extra factor qⁿ in front.

The closed form divides by 1 − q, so it fails when q = 1, that is, when the growth rate or the terminal rate equals the discount rate. The calculator reports an error in that case. If you really need it, nudge one rate by a hundredth of a point, or note that when the rates are equal every year contributes exactly V after discounting and the stage is simply worth V × (number of years).

Worked example

Suppose a business throws off 1,000 dollars of free cash flow today. You expect 5% growth for five years, then 2% growth for ten more years, and you discount at 10%.

The five discounted amounts add up to $4,358.12 (the table is rounded line by line, so adding its last column by hand can differ by a cent). The terminal stage starts from the year-five cash flow of $1,276.28 and grows 2% a year: year 6 is $1,301.81, worth $734.84 today, and year 15 is $1,555.78, worth $372.44 today. Summing all ten terminal years gives $5,355.37.

Total = $4,358.12 + $5,355.37 = $9,713.49

Notice that more than half of the value comes from the terminal stage, even though growth there is slower. That is common in DCF work and is why the terminal assumptions deserve as much scrutiny as the early forecast.

Moving the discount rate by two points in either direction shifts the total by roughly 11 to 14%. Running a few scenarios like this is a better habit than trusting a single number.

Choosing sensible inputs

• Starting value. Use a cash flow that is typical, not a record year. Free cash flow (operating cash flow minus capital spending) is usually a better base than accounting profit.
• Discount rate. It should match the risk of the cash flows. Safer, steadier businesses deserve a lower rate; speculative ones a higher rate. Whatever you pick, be consistent: the same rate should reflect the same assumptions about inflation as your growth numbers.
• Growth rate and length. Look at the past, at the industry, and at how large the business already is. A company cannot out-grow the economy forever, so long, high-growth stages are a red flag.
• Terminal rate. Keep it modest, at or below the long-run growth of the economy, and below the discount rate.

Because the terminal stage here lasts a fixed number of years rather than forever, the result is a conservative value for a business that is expected to last indefinitely. Lengthen the terminal stage if you want to approximate a going concern.

What a DCF cannot tell you

A DCF is only as reliable as its inputs, and small changes in the discount or growth rate move the answer a lot, as the example shows. The model also treats cash flows as arriving in tidy yearly lumps, ignores debt and cash on the balance sheet (so the result is a value of the cash flow stream, not directly a share price), and assumes the forecast path is smooth.

To compare the estimate with what you would pay, subtract the price: that is the idea behind the NPV calculator. To find the return a project earns on its price, use the IRR calculator.

Results are estimates for learning and planning, not investment advice. See our disclaimer.