Discounted Cash Flow Calculator

What Is Discounted Cash Flow (DCF) Analysis?

DCF analysis estimates the intrinsic value of an investment by projecting its future cash flows and discounting them back to present value. The core principle: a dollar received today is worth more than a dollar received in the future because today's dollar can be invested and grow. DCF quantifies this time-value-of-money concept to determine what you should pay for any income-producing asset — a stock, business, rental property, or project.

The formula: DCF Value = Σ (Cash Flow in Year N ÷ (1 + Discount Rate)^N) + Terminal Value. You project cash flows for each year of the forecast period (typically 5-10 years), discount each back to today, then add the terminal value (the present value of all cash flows beyond the forecast period). If the DCF value exceeds the current price, the investment is potentially undervalued. If below, it may be overvalued.

Building a DCF Model Step by Step

Step 1 — Project free cash flows: Start with the company's current free cash flow (FCF) and estimate growth rates. Conservative: 3-5% for mature companies. Moderate: 5-10% for growing companies. Aggressive: 10-20% for high-growth companies. Be realistic — sustained 15%+ growth is rare beyond 5 years.

Step 2 — Select a discount rate: The discount rate reflects the required return for the investment's risk level. For stocks, use the Weighted Average Cost of Capital (WACC) — typically 8-12% for large companies. Higher for small/risky companies (12-15%). The discount rate is the most sensitive input: a 2% change can swing the DCF value by 30-50%.

Step 3 — Calculate terminal value: Most of a DCF's value comes from the terminal value — the perpetuity value beyond your forecast. Two methods: Gordon Growth Model (final year FCF × (1 + perpetual growth rate) ÷ (discount rate - perpetual growth rate), with perpetual growth typically 2-3%), or Exit Multiple (final year FCF × industry EV/FCF multiple). Terminal value typically represents 60-80% of total DCF value.

Step 4 — Sum and interpret: Add all discounted cash flows + discounted terminal value = Enterprise Value. Subtract net debt. Divide by shares outstanding = Intrinsic Value Per Share. Compare to current stock price. If intrinsic value is 20%+ above the current price, the stock may be undervalued (a "margin of safety"). If below, it may be overvalued or fairly priced.

DCF Limitations and Common Mistakes

Garbage in, garbage out: DCF is only as reliable as its assumptions. Overly optimistic growth rates, understated discount rates, or aggressive terminal values produce inflated valuations that justify any price. The best DCF models use conservative assumptions and sensitivity analysis showing how value changes across a range of inputs.

Sensitivity analysis is essential: Run your DCF with multiple scenarios: base case (most likely), bull case (optimistic but possible), and bear case (pessimistic but plausible). If all three scenarios show the stock as undervalued, conviction is high. If only the bull case justifies the price, the margin of safety is thin.

Terminal value dominance: Since terminal value often represents 60-80% of total DCF value, small changes in perpetual growth rate or exit multiple have outsized effects. A perpetual growth rate of 2% vs 3% can change the DCF by 25-40%. Always sanity-check: does the implied terminal value make sense relative to the company's size and industry?

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