Dcf Calculation

by

Discounted Cash Flow (DCF) Calculator

Use this calculator to estimate the intrinsic value of a company or project by projecting its future free cash flows and discounting them back to the present.

$
%
%
%

DCF Calculation Results

Enter values and click "Calculate DCF" to see the results.

function calculateDCF() { var initialFCF = parseFloat(document.getElementById('initialFCF').value); var forecastYears = parseInt(document.getElementById('forecastYears').value); var fcfGrowthRate = parseFloat(document.getElementById('fcfGrowthRate').value) / 100; var discountRate = parseFloat(document.getElementById('discountRate').value) / 100; var terminalGrowthRate = parseFloat(document.getElementById('terminalGrowthRate').value) / 100; if (isNaN(initialFCF) || isNaN(forecastYears) || isNaN(fcfGrowthRate) || isNaN(discountRate) || isNaN(terminalGrowthRate) || initialFCF < 0 || forecastYears < 1 || discountRate = discountRate) { document.getElementById('result').innerHTML = 'Terminal Growth Rate must be less than the Discount Rate for a valid Terminal Value calculation.'; return; } var totalPVForecastedFCF = 0; var currentFCF = initialFCF; var forecastedFCFs = []; // Calculate and discount forecasted FCFs for (var i = 1; i 1) { currentFCF *= (1 + fcfGrowthRate); } forecastedFCFs.push(currentFCF); var pvFCF = currentFCF / Math.pow((1 + discountRate), i); totalPVForecastedFCF += pvFCF; } // Calculate Terminal Value (TV) var lastForecastFCF = forecastedFCFs[forecastYears – 1]; var fcfYearAfterForecast = lastForecastFCF * (1 + terminalGrowthRate); var terminalValue = fcfYearAfterForecast / (discountRate – terminalGrowthRate); // Discount Terminal Value back to present var pvTerminalValue = terminalValue / Math.pow((1 + discountRate), forecastYears); // Calculate Total Enterprise Value var enterpriseValue = totalPVForecastedFCF + pvTerminalValue; var resultsHTML = '

Detailed Breakdown:

'; resultsHTML += 'Present Value of Forecasted FCFs: $' + totalPVForecastedFCF.toLocaleString(undefined, { minimumFractionDigits: 2, maximumFractionDigits: 2 }) + "; resultsHTML += 'Terminal Value (at end of forecast period): $' + terminalValue.toLocaleString(undefined, { minimumFractionDigits: 2, maximumFractionDigits: 2 }) + "; resultsHTML += 'Present Value of Terminal Value: $' + pvTerminalValue.toLocaleString(undefined, { minimumFractionDigits: 2, maximumFractionDigits: 2 }) + "; resultsHTML += '

Estimated Enterprise Value: $' + enterpriseValue.toLocaleString(undefined, { minimumFractionDigits: 2, maximumFractionDigits: 2 }) + '

'; document.getElementById('result').innerHTML = resultsHTML; } .dcf-calculator-container { font-family: 'Segoe UI', Tahoma, Geneva, Verdana, sans-serif; background-color: #f9f9f9; border: 1px solid #ddd; border-radius: 8px; padding: 25px; max-width: 700px; margin: 20px auto; box-shadow: 0 4px 12px rgba(0, 0, 0, 0.08); color: #333; } .dcf-calculator-container h2 { color: #0056b3; text-align: center; margin-bottom: 20px; font-size: 1.8em; } .dcf-calculator-container h3 { color: #0056b3; margin-top: 20px; font-size: 1.4em; } .dcf-calculator-container p { line-height: 1.6; margin-bottom: 10px; } .calculator-form .form-group { display: flex; align-items: center; margin-bottom: 15px; flex-wrap: wrap; } .calculator-form label { flex: 2; margin-right: 15px; font-weight: bold; color: #555; min-width: 180px; } .calculator-form input[type="number"] { flex: 1; padding: 10px; border: 1px solid #ccc; border-radius: 5px; min-width: 100px; box-sizing: border-box; } .calculator-form span { margin-left: 10px; font-weight: bold; color: #555; } .calculator-form button { display: block; width: 100%; padding: 12px 20px; background-color: #007bff; color: white; border: none; border-radius: 5px; font-size: 1.1em; cursor: pointer; transition: background-color 0.3s ease; margin-top: 20px; } .calculator-form button:hover { background-color: #0056b3; } .calculator-results { background-color: #eef7ff; border: 1px solid #cce5ff; border-radius: 8px; padding: 20px; margin-top: 25px; } .calculator-results h3 { color: #0056b3; text-align: center; margin-bottom: 15px; } .calculator-results p { font-size: 1.1em; margin-bottom: 8px; color: #333; } .calculator-results p strong { color: #0056b3; } .calculator-results span { font-weight: bold; } @media (max-width: 600px) { .calculator-form .form-group { flex-direction: column; align-items: flex-start; } .calculator-form label { margin-bottom: 5px; min-width: unset; } .calculator-form input[type="number"] { width: 100%; } }

Understanding Discounted Cash Flow (DCF) Valuation

The Discounted Cash Flow (DCF) method is a fundamental valuation technique used to estimate the intrinsic value of an investment, typically a company or a project. It operates on the principle that an asset's value is derived from the sum of its future cash flows, discounted back to their present value.

What is Free Cash Flow (FCF)?

Free Cash Flow (FCF) represents the cash a company generates after accounting for cash outflows to support its operations and maintain its capital assets. It's the cash available to all capital providers (debt and equity holders) and is often considered a truer measure of a company's financial performance than net income, as it's less susceptible to accounting manipulations.

FCF can be calculated in various ways, but a common approach is:

FCF = EBIT * (1 - Tax Rate) + Depreciation & Amortization - Capital Expenditures - Change in Net Working Capital

Where EBIT is Earnings Before Interest and Taxes.

The Core Principle of DCF

Money today is worth more than the same amount of money in the future due to its potential earning capacity (time value of money) and inflation. The DCF model accounts for this by "discounting" future cash flows. Each future cash flow is reduced by a discount rate, which reflects the risk and opportunity cost associated with receiving that cash flow later.

Key Components of a DCF Model

  1. Forecast Period Free Cash Flows:

    This involves projecting a company's FCF for a specific number of years into the future, typically 5 to 10 years. These projections are based on historical performance, industry trends, management guidance, and economic forecasts. The FCF Growth Rate input in the calculator applies to this explicit forecast period.

  2. Discount Rate (Weighted Average Cost of Capital – WACC):

    The discount rate is crucial. For a company, it's usually the Weighted Average Cost of Capital (WACC). WACC represents the average rate of return a company expects to pay to all its security holders (debt and equity) to finance its assets. It's the rate used to discount future cash flows back to their present value. A higher WACC implies higher risk or higher opportunity cost, leading to a lower present value.

    WACC = (E/V) * Re + (D/V) * Rd * (1 - Tc)

    Where: E = Market value of equity, D = Market value of debt, V = E + D, Re = Cost of equity, Rd = Cost of debt, Tc = Corporate tax rate.

  3. Terminal Value (TV):

    It's impractical to forecast cash flows indefinitely. Terminal Value accounts for all cash flows beyond the explicit forecast period. It's typically calculated using a perpetuity growth model, assuming the company will grow at a constant, sustainable rate forever after the forecast period.

    Terminal Value = [FCF_last_forecast_year * (1 + Terminal Growth Rate)] / (Discount Rate - Terminal Growth Rate)

    The Terminal Growth Rate should be a modest, sustainable rate, usually not exceeding the long-term GDP growth rate of the economy in which the company operates.

  4. Present Value of Terminal Value:

    Once the Terminal Value is calculated at the end of the forecast period, it must also be discounted back to the present day using the same discount rate.

  5. Enterprise Value:

    The sum of the present values of the explicit forecast period's FCFs and the present value of the Terminal Value gives you the total Enterprise Value (EV) of the company. This represents the total value of the company's operating assets, attributable to both debt and equity holders.

How to Use the DCF Calculator

  • Initial Free Cash Flow (Year 1): Input your projected FCF for the first year of your forecast. This is your starting point.
  • Number of Forecast Years: Specify how many years you want to explicitly project FCFs. Common periods are 5 or 10 years.
  • FCF Growth Rate (Forecast Period): Enter the annual growth rate you expect your FCFs to achieve during the explicit forecast period.
  • Discount Rate (WACC): Input the Weighted Average Cost of Capital (WACC) for the company. This is your required rate of return.
  • Terminal Growth Rate: Provide the perpetual growth rate for FCFs beyond your forecast period. This rate must be less than your Discount Rate.

Example Calculation

Let's use the default values in the calculator:

  • Initial Free Cash Flow (Year 1): $1,000,000
  • Number of Forecast Years: 5
  • FCF Growth Rate (Forecast Period): 5%
  • Discount Rate (WACC): 10%
  • Terminal Growth Rate: 2%

Step 1: Project FCFs for the Forecast Period

  • Year 1 FCF: $1,000,000
  • Year 2 FCF: $1,000,000 * (1 + 0.05) = $1,050,000
  • Year 3 FCF: $1,050,000 * (1 + 0.05) = $1,102,500
  • Year 4 FCF: $1,102,500 * (1 + 0.05) = $1,157,625
  • Year 5 FCF: $1,157,625 * (1 + 0.05) = $1,215,506.25

Step 2: Discount Each Forecasted FCF to Present Value

  • PV Year 1 FCF: $1,000,000 / (1 + 0.10)^1 = $909,090.91
  • PV Year 2 FCF: $1,050,000 / (1 + 0.10)^2 = $867,768.60
  • PV Year 3 FCF: $1,102,500 / (1 + 0.10)^3 = $828,121.50
  • PV Year 4 FCF: $1,157,625 / (1 + 0.10)^4 = $790,117.00
  • PV Year 5 FCF: $1,215,506.25 / (1 + 0.10)^5 = $753,800.00

Total PV of Forecasted FCFs: $909,090.91 + $867,768.60 + $828,121.50 + $790,117.00 + $753,800.00 = $4,148,898.01

Step 3: Calculate Terminal Value (TV) at the end of Year 5

  • FCF for Year 6 (Year 5 FCF * (1 + Terminal Growth Rate)): $1,215,506.25 * (1 + 0.02) = $1,239,816.38
  • Terminal Value: $1,239,816.38 / (0.10 – 0.02) = $1,239,816.38 / 0.08 = $15,497,704.75

Step 4: Discount Terminal Value to Present Value

  • PV of Terminal Value: $15,497,704.75 / (1 + 0.10)^5 = $15,497,704.75 / 1.61051 = $9,623,970.00

Step 5: Calculate Total Enterprise Value

  • Enterprise Value = Total PV of Forecasted FCFs + PV of Terminal Value
  • Enterprise Value = $4,148,898.01 + $9,623,970.00 = $13,772,868.01

This example demonstrates how the calculator arrives at the estimated enterprise value by systematically projecting and discounting future cash flows.

Limitations of DCF

While powerful, DCF is highly sensitive to its inputs. Small changes in the growth rate, discount rate, or terminal growth rate can lead to significant variations in the estimated value. It relies heavily on assumptions about the future, which are inherently uncertain. Therefore, DCF is best used as one tool among many in a comprehensive valuation analysis, often alongside comparable company analysis and precedent transactions.

Leave a Comment