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Discounted Cash Flow Calculator

Range: 0 – 50

Range: -10 – 20

Result

483,609.02

Enterprise value

Present value of forecast
144,172.03
Terminal value
601,333.33
Terminal value today
339,436.99
Share from terminal value
70.19%

A discounted cash flow turns a forecast of money arriving in the future into a single value today. The idea is that a dollar received in five years is worth less than a dollar received now, so each year's cash flow is divided by a compounding factor before being added up; the result is the enterprise value, or what the whole stream is worth as of today. The part that catches people out is what happens after the forecast ends. A forecast of five years describes five years, not a company, so a terminal value stands in for everything beyond the last year — normally by assuming the final year's cash flow grows at a steady rate forever. On most real inputs that terminal value is the majority of the answer, and this page shows exactly how large a majority by printing its share. Enter the future cash flows in order, the discount rate and the growth rate you assume after the forecast, and the page returns the discounted forecast, the terminal value and its present value, the enterprise value and the terminal share. It is the same arithmetic a DCF spreadsheet runs, with the two assumptions that decide the outcome made visible instead of buried.

The default forecast at six discount rates, with growth after it held at 2.5 percent

Discount ratePresent value of forecastTerminal value, todayEnterprise valueTerminal share
6164796.59908392.011073188.684.64
8153968.13516739.09670707.2277.04
10144172.03339436.99483609.0270.19
12135287.32240516.46375803.7864
14127209.45178669.16305878.6158.41
16119847.79137118.11256965.953.36

The axis is the discount rate because it is the assumption that moves the answer most and the one a reader is most likely to want to vary. The cash flows and the terminal growth rate are held at the defaults, so any row can be reproduced by changing the rate alone. Read the last column down: at 6 percent the terminal share is 84.64 percent and at 16 percent it is 53.36, so a rate change that takes three quarters off the enterprise value also cuts the share by more than a third. That is the pattern worth remembering — a higher discount rate shrinks the distant money faster than the near money, and the terminal value is the most distant money there is. The middle column behaves the same way but far more gently: the forecast's present value falls from 164,796.59 to 119,847.79 across the table, a fall of twenty-seven percent, while the enterprise value falls by seventy-six. The first row and the last row describe the same forecast and the same business; only the return required of the money changed.

Formula

Present value of forecast = sum over i of (cash flow in year i ÷ (1 + discount rate ÷ 100) ^ i); terminal value = final year cash flow × (1 + terminal growth ÷ 100) ÷ (discount rate − terminal growth) × 100; terminal value present value = terminal value ÷ (1 + discount rate ÷ 100) ^ n; enterprise value = present value of forecast + terminal value present value; terminal share = terminal value present value ÷ enterprise value × 100

Cash flows
The forecast itself, one figure per year, entered in order and separated by spaces. The first figure is year one and is discounted by one year, not left undiscounted — the period convention is that the money arrives at the end of each year. Interior years may be negative, which is normal for a project with building costs or an early loss, but the last year must be positive because the terminal value is built from it and a negative final year would produce a negative value for a going concern.
Discount rate
The annual return the money has to earn to be worth tying up, expressed as a percentage. It is the single most consequential assumption on the page, because the whole forecast is divided by it compounding, and it is not something this page can derive — for a company it is usually built up from a risk-free rate plus a premium for the risk of the cash flows, which is what a weighted average cost of capital computes. Raising it lowers every future year, and lowers the terminal value by more than it lowers the early years, so the terminal share falls as well.
Terminal growth
The rate the final year's cash flow is assumed to grow at forever, used to build the terminal value. It must be strictly below the discount rate, because the formula divides by the difference between them: at equality the value is infinite and above it the sum diverges, and neither is a fact about a business. In practice it has to be below long-run economic growth, since a company growing faster than the economy forever eventually becomes the economy. It may be negative, which is a defensible assumption for a business in decline.
Present value of forecast
The forecast years with the discounting already applied, summed. This is the part of the answer that rests on the forecast you actually wrote down, which makes it the more trustworthy half — and, as the share below usually shows, the smaller half.
Terminal value
What everything after the last forecast year is assumed to be worth, as of the end of that year. It is not a valuation of the final year; it is the sum of all the years after it, under the assumption that the cash flow grows at a constant rate forever. The formula is the growing perpetuity: the final year's flow, grown one more year, divided by the spread between the discount rate and the growth rate.
Terminal value present value
The terminal value discounted back to today, using the same rate and the same number of years as the last forecast year. It has to be discounted because the terminal value is dated at the end of the forecast, and it is this figure — not the undiscounted one — that gets added to the forecast to produce the enterprise value.
Enterprise value
The two present values added together: what the whole stream is worth today. It is the answer the page exists to produce, and reading it without the share beside it is the mistake this page is built to prevent — a large enterprise value can be almost entirely an assumption about the indefinite future rather than a conclusion from the forecast.
Terminal share
The terminal value present value as a percentage of the enterprise value. It is the honesty check on everything above. A share above about three quarters means the forecast you wrote is a minor contributor and the growth rate you assumed after it is doing most of the work; a share near half means the two halves are balanced. The figure moves a great deal with the length of the forecast, from over ninety percent for a single year to under one percent for sixty, so it measures the horizon as much as it measures the assumptions.

Use it when a stream of future cash flows is the thing being valued — a project, a business, a licence, anything whose worth is a function of money arriving over time. It is the standard method for valuing a company that has no comparable sales price, and it is the one a spreadsheet is usually built to run. Use it in preference to a payback period or a simple multiple when the timing of the money matters, since neither of those can tell the difference between a project that returns its cost in year two and one that returns it in year nine. Two things to be clear about before you rely on the number. The output is a function of two assumptions the page cannot check, and the terminal share tells you which of them is carrying the answer — if it is very high, you are valuing the growth rate rather than the forecast, and the honest response is to extend the forecast rather than to defend the rate. And a DCF produces a value for the cash flows, not for the equity: debt is not in any field here, so the enterprise value is what the whole business is worth, and what a share is worth is a further step for which this page has no inputs.

Worked examples

  1. The default: six years of growing cash flow at 10 percent, then 2.5 percent forever

    1. Year 1: 25,000 ÷ 1.10 = 22,727.27
    2. Year 2: 28,000 ÷ 1.21 = 23,140.50
    3. Year 3: 32,000 ÷ 1.331 = 24,042.07
    4. Year 4: 36,000 ÷ 1.4641 = 24,588.48
    5. Year 5: 40,000 ÷ 1.61051 = 24,836.85
    6. Year 6: 44,000 ÷ 1.771561 = 24,836.86
    7. Present value of forecast: 144,172.03
    8. Terminal value: 44,000 × 1.025 ÷ 0.075 = 601,333.33
    9. Terminal value today: 601,333.33 ÷ 1.771561 = 339,436.99
    10. Enterprise value: 144,172.03 + 339,436.99 = 483,609.02
    11. Terminal share: 339,436.99 ÷ 483,609.02 = 70.19 percent

    The forecast is six years of rising cash flow and it accounts for 144,172 of the 483,609 — under thirty percent. The other seventy percent is a single assumption about what happens from year seven onwards, applied forever. That is not a flaw in the method, it is what the method does, and it is why this page prints the share: the number that looks like a conclusion is mostly a premise.

  2. The same forecast with no growth after it

    1. Present value of forecast: unchanged at 144,172.03
    2. Terminal value: 44,000 × 1.00 ÷ 0.10 = 440,000
    3. Terminal value today: 440,000 ÷ 1.771561 = 248,368.53
    4. Enterprise value: 144,172.03 + 248,368.53 = 392,540.56
    5. Terminal share: 248,368.53 ÷ 392,540.56 = 63.27 percent

    Dropping the growth assumption from 2.5 percent to zero takes 91,068 off the value, a fall of just under nineteen percent, and nothing about the six-year forecast changed. The mechanism is worth seeing: the terminal value divides by the spread between the discount rate and the growth rate, so at a 10 percent discount rate a 2.5 percent growth assumption multiplies the final year's flow by more than thirteen while no growth multiplies it by ten. A small change in a rate that describes forever is a large change in the answer.

  3. A single year of cash flow

    1. Year 1: 50,000 ÷ 1.08 = 46,296.30
    2. Terminal value: 50,000 × 1.02 ÷ 0.06 = 850,000
    3. Terminal value today: 850,000 ÷ 1.08 = 787,037.04
    4. Enterprise value: 46,296.30 + 787,037.04 = 833,333.34
    5. Terminal share: 787,037.04 ÷ 833,333.34 = 94.44 percent

    With one year in the forecast the terminal value is 94 percent of the answer, so this is not really a valuation of a one-year forecast — it is the perpetuity formula wearing a forecast as a hat. The page accepts a single year because there is nothing wrong with the arithmetic, and because seeing the share at 94 percent is more instructive than being refused. If your analysis of a business produces a number like this, the honest conclusion is that you have valued the growth assumption.

  4. A negative first year: building before earning

    1. Year 1: −10,000 ÷ 1.12 = −8,928.57
    2. Year 2: 5,000 ÷ 1.2544 = 3,985.97
    3. Year 3: 30,000 ÷ 1.404928 = 21,353.41
    4. Present value of forecast: −8,928.57 + 3,985.97 + 21,353.41 = 16,410.81
    5. Terminal value: 30,000 × 1.03 ÷ 0.09 = 343,333.33
    6. Terminal value today: 343,333.33 ÷ 1.404928 = 244,377.88
    7. Enterprise value: 16,410.81 + 244,377.88 = 260,788.69
    8. Terminal share: 244,377.88 ÷ 260,788.69 = 93.71 percent

    Interior years may be negative, and this one starts with a loss: the first year subtracts from the total rather than adding to it, and the forecast is still valid because the final year is positive. Note that the forecast as a whole contributes only 16,411, with the negative opening year cancelling most of two profitable ones after discounting. The guard that rejects a non-positive final year exists because the terminal value is built by growing it — a negative last flow would produce a negative perpetuity, which is not a meaningful value for something expected to continue.

  5. Sixty years of the same cash flow: where the terminal share goes

    1. Each of the sixty flows discounted at 10 percent and summed = 9,967.16
    2. Terminal value: 1,000 × 1.025 ÷ 0.075 = 13,666.67
    3. Terminal value today: 13,666.67 ÷ 1.1 to the sixtieth = 44.89
    4. Enterprise value: 9,967.16 + 44.89 = 10,012.05
    5. Share from terminal value: 44.89 ÷ 10,012.05 = 0.45 percent

    Sixty years of the same 1,000 a year is worth 9,967 today, and the terminal value adds less than 45 to it — under half of one percent of the answer. The reason is arithmetic rather than economic: at a 10 percent discount rate a dollar sixty years out is worth about one three-hundredth of a dollar now, so the perpetuity beyond year sixty is worth almost nothing. This is the other end of the range from the single-year case, and it shows that the terminal share measures how long your forecast is as much as it measures what you assumed after it. Lengthening the forecast is the most effective way to reduce it, and the reason a thorough DCF runs ten or fifteen years rather than five.

Limitations

The page is arithmetic and the two rates are assumptions it cannot check. The discount rate is not derived from anything in the inputs: for a company it should reflect the risk of the cash flows, usually built up from a risk-free rate plus a premium, and using one that is too low inflates every figure on the panel without any sign of trouble. The growth rate is the more dangerous of the two because it applies forever — a rate a fraction of a percent above what an economy can sustain produces a value that grows without bound, and the formula will happily return it as long as the growth rate stays below the discount rate. The forecast itself is taken as given and certain, when it is a forecast; there is no scenario analysis, no probability weighting and no way to express that year four is far less predictable than year one. Taxes, capital expenditure and changes in working capital are not modelled, so if the figures entered are accounting earnings rather than cash flows the result is not a discounted cash flow at all. Nothing here separates debt from equity, which means the enterprise value is not a share price and cannot be turned into one without a further calculation the page does not perform. And the terminal value assumes the business grows smoothly and indefinitely at one rate, which no business has ever done: it is a convenience for pricing the future, and the terminal share exists to keep that convenience visible.

Frequently asked questions

Why is the terminal value such a large part of the answer?
Because a business is assumed to continue past the end of the forecast, and the years after the last one are infinitely many even though each is heavily discounted. On the default figures the six forecast years are worth 144,172 and everything from year seven onwards is worth 339,437. That is normal for the method and it is not an error. It becomes a problem when the share is so high that the forecast is no longer doing any work — a single-year forecast gives a share above ninety percent — and the fix is to forecast further out rather than to argue about the growth rate.
How do I choose the discount rate?
It has to reflect what the money could earn elsewhere at comparable risk, which for a company is usually a weighted average cost of capital: the blended cost of its debt and its equity, weighted by how much of each it uses. Building one is a separate calculation with inputs this page does not have. What matters here is knowing that the rate is not a formality — moving it from 10 to 12 percent moves the default enterprise value by well over a hundred thousand, and it lowers the terminal value proportionally more than the forecast years because the terminal value is the most distant money in the model.
What growth rate is realistic after the forecast?
Below the long-run growth rate of the economy the business operates in, because a company that grows faster than the economy forever eventually becomes a larger share of it than is possible. Many practitioners simply use expected inflation for a mature business, on the reasoning that real growth beyond the forecast horizon is not something they can claim. A negative rate is allowed and is sometimes the right assumption for a declining industry. There is no way to pick it from the page: it is a judgement about the indefinite future, and the terminal share tells you how much of your answer rests on it.
Why must the last cash flow be positive?
Because the terminal value is built by growing it. A non-positive final year would produce a terminal value of zero or a negative one, and a negative value for a business assumed to continue indefinitely is not a meaningful number — it would say that continuing destroys value at a constant rate forever. If your forecast genuinely ends with a loss, the forecast is too short: extend it until the business is past the loss-making phase, or model the ending as a sale rather than as a perpetuity. Interior years are unrestricted, so a project that loses money while it is being built is fine.
What happens if the growth rate equals the discount rate?
The page refuses the calculation. The terminal value divides by the discount rate minus the growth rate, so at equality the divisor is zero and the value is infinite; above it the growing perpetuity does not converge at all. Neither is a fact about a business, and printing an enormous number would be worse than printing an error, because it would look like an answer. The guard applies to the strict comparison, so a discount rate of 5.001 percent against a growth rate of 5 percent is accepted and produces a very large but finite value.
Does enterprise value tell me what the shares are worth?
No. Enterprise value is the value of the whole business's cash flows, before any claim on them — it belongs to the lenders and the owners together. Turning it into a value per share means subtracting net debt, adding cash, and dividing by the number of shares, none of which is a field on this page. A DCF that produces a large enterprise value for a heavily indebted company can still imply a modest equity value, and the difference is not a detail. If you need a share price, the enterprise value is a step in that calculation rather than the end of it.

References

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