DCF Valuation Calculator
Find out what your business is really worth using the same valuation method used by investment banks and private equity firms.
How the DCF Valuation Calculator works
Enter your projected cash flows, growth rate, and discount rate. The calculator determines your business’s present value by discounting future cash flows to today’s dollars.
DCF shows you what a business is worth based on the cash it generates, not market hype. It’s the method professionals use because it focuses on real value, not emotion.
How it works
Tutorial
Most investors struggle with business valuation because they focus on surface-level numbers like revenue without understanding the time value of money. DCF (Discounted Cash Flow) valuation shows you what a business is really worth by calculating the present value of future cash flows. This method reveals true business value regardless of market hype or temporary trends.
Understanding DCF helps you make better investment decisions, plan business exits, and evaluate acquisition opportunities. Unlike simple comparisons to similar companies, DCF makes you think deeply about cash generation, growth, and risk. Investment banks use DCF to value everything from startups to Fortune 500 companies because it’s based on fundamental finance, not market psychology.
The Basic Formula
| Component | Formula | What It Means |
|---|---|---|
| Present Value of Cash Flow | PV = CF₁/(1+r)¹ + CF₂/(1+r)² + … + CFₙ/(1+r)ⁿ | Future cash flows converted to today’s value |
| Terminal Value | TV = CFₙ × (1 + g) / (r – g) | Value of all cash flows after your projection period |
| Enterprise Value | EV = PV of Cash Flows + PV of Terminal Value | Total business value before adjusting for debt |
| Equity Value | Equity = Enterprise Value – Net Debt | Value available to shareholders |
Step-by-Step Calculation
Example:Software company with $2M annual free cash flow, 15% growth for 5 years, then 3% perpetual growth, 12% discount rate, $500K net debt
Step 1: Project Future Cash Flows
| Year | Calculation | Free Cash Flow |
|---|---|---|
| Year 1 | $2,000,000 × 1.15 | $2,300,000 |
| Year 2 | $2,300,000 × 1.15 | $2,645,000 |
| Year 3 | $2,645,000 × 1.15 | $3,041,750 |
| Year 4 | $3,041,750 × 1.15 | $3,497,963 |
| Year 5 | $3,497,963 × 1.15 | $4,022,657 |
Step 2: Calculate Present Value of Cash Flows
| Year | Cash Flow | Discount Factor (12%) | Present Value |
|---|---|---|---|
| 1 | $2,300,000 | 1/(1.12)¹ = 0.8929 | $2,053,571 |
| 2 | $2,645,000 | 1/(1.12)² = 0.7972 | $2,108,585 |
| 3 | $3,041,750 | 1/(1.12)³ = 0.7118 | $2,165,116 |
| 4 | $3,497,963 | 1/(1.12)⁴ = 0.6355 | $2,223,175 |
| 5 | $4,022,657 | 1/(1.12)⁵ = 0.5674 | $2,282,860 |
| Total PV of Cash Flows | $10,833,307 | ||
Step 3: Calculate Terminal Value and Final Valuation
| Component | Calculation | Result |
|---|---|---|
| Year 6 Cash Flow | $4,022,657 × 1.03 | $4,143,337 |
| Terminal Value | $4,143,337 / (0.12 – 0.03) | $46,037,078 |
| PV of Terminal Value | $46,037,078 × 0.5674 | $26,117,838 |
| Enterprise Value | $10,833,307 + $26,117,838 | $36,951,145 |
| Less: Net Debt | -$500,000 | -$500,000 |
| Equity Value | Final Valuation | $36,451,145 |
What This Means
This software company is worth approximately $36.5 million to shareholders. Notice that over 70% of the value comes from the terminal value-the cash flows beyond year 5. This is typical in DCF models and shows why your assumptions about long-term growth and discount rates matter enormously. A 1% change in either rate can swing valuation by millions.
The 12% discount rate reflects the risk that these projections might not happen. Higher-risk businesses need higher discount rates, which lower present value. The 15% growth for 5 years is aggressive but reasonable for a software company with strong demand. The 3% perpetual growth matches long-term economic growth-a standard assumption. If this company’s market price is below $36M, it may be undervalued. Above $40M means it’s priced for perfection.
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