Discount Cash Flow Calculator

Discounted Cash Flow (DCF) Calculator

Calculation Results:

Present Value of Projected FCFs: $0.00

Terminal Value: $0.00

Present Value of Terminal Value: $0.00

Total Enterprise Value (DCF): $0.00

function calculateDCF() { var initialFCF = parseFloat(document.getElementById('initialFCF').value); var growthRate = parseFloat(document.getElementById('growthRate').value); var projectionYears = parseInt(document.getElementById('projectionYears').value); var discountRate = parseFloat(document.getElementById('discountRate').value); var terminalGrowthRate = parseFloat(document.getElementById('terminalGrowthRate').value); // Input validation if (isNaN(initialFCF) || initialFCF <= 0) { alert('Please enter a valid positive Initial Free Cash Flow.'); return; } if (isNaN(growthRate)) { alert('Please enter a valid FCF Growth Rate.'); return; } if (isNaN(projectionYears) || projectionYears <= 0) { alert('Please enter a valid positive number for Explicit Projection Years.'); return; } if (isNaN(discountRate) || discountRate <= 0) { alert('Please enter a valid positive Discount Rate (WACC).'); return; } if (isNaN(terminalGrowthRate)) { alert('Please enter a valid Terminal Growth Rate.'); return; } if (discountRate <= terminalGrowthRate) { alert('The Discount Rate must be greater than the Terminal Growth Rate for the Terminal Value calculation.'); return; } var projectedFCFs = []; var pvProjectedFCFsSum = 0; var currentFCF = initialFCF; // Calculate projected FCFs and their present values for the explicit projection period for (var i = 1; i 1) { currentFCF *= (1 + growthRate); } projectedFCFs.push(currentFCF); var pv = currentFCF / Math.pow((1 + discountRate), i); pvProjectedFCFsSum += pv; } // Calculate Terminal Value var fcfAfterProjection = projectedFCFs[projectionYears – 1] * (1 + terminalGrowthRate); var terminalValue = fcfAfterProjection / (discountRate – terminalGrowthRate); // Calculate Present Value of Terminal Value var pvTerminalValue = terminalValue / Math.pow((1 + discountRate), projectionYears); // Calculate Total DCF Value var totalDCFValue = pvProjectedFCFsSum + pvTerminalValue; // Display results document.getElementById('pvProjectedFCFs').innerText = '$' + pvProjectedFCFsSum.toLocaleString('en-US', { minimumFractionDigits: 2, maximumFractionDigits: 2 }); document.getElementById('terminalValue').innerText = '$' + terminalValue.toLocaleString('en-US', { minimumFractionDigits: 2, maximumFractionDigits: 2 }); document.getElementById('pvTerminalValue').innerText = '$' + pvTerminalValue.toLocaleString('en-US', { minimumFractionDigits: 2, maximumFractionDigits: 2 }); document.getElementById('totalDCFValue').innerText = '$' + totalDCFValue.toLocaleString('en-US', { minimumFractionDigits: 2, maximumFractionDigits: 2 }); }

Understanding the Discounted Cash Flow (DCF) Method

The Discounted Cash Flow (DCF) method is a widely used valuation technique that estimates the value of an investment based on its expected future cash flows. The core principle is that an asset's value is the sum of its future cash flows, discounted back to the present day. This method is particularly popular for valuing companies, projects, or even individual assets.

Why Use DCF?

• Intrinsic Value: DCF aims to determine the intrinsic value of an asset, which is its true worth based on its ability to generate cash, rather than its market price.
• Forward-Looking: It focuses on future performance, making it useful for assessing growth opportunities and long-term potential.
• Detailed Analysis: It requires a deep understanding of a company's operations, financial projections, and industry dynamics.

Key Components of a DCF Analysis

To perform a DCF valuation, several key inputs are required:

1. Free Cash Flow (FCF): This represents the cash a company generates after accounting for cash outflows to support operations and maintain its capital assets. It's the cash available to all capital providers (debt and equity holders). The calculator uses an "Initial Free Cash Flow (Year 1)" as the starting point for projections.
2. FCF Growth Rate: This is the assumed annual rate at which the Free Cash Flow will grow during the explicit projection period. This rate often declines over time as a company matures.
3. Explicit Projection Years: This is the number of years for which individual Free Cash Flows are explicitly forecasted. Typically, this period ranges from 5 to 10 years, depending on the predictability of the business.
4. Discount Rate (WACC): The Weighted Average Cost of Capital (WACC) is commonly used as the discount rate. It represents the average rate of return a company expects to pay to finance its assets. It's the rate used to discount future cash flows to their present value, reflecting the risk associated with those cash flows.
5. Terminal Growth Rate: This is the assumed constant rate at which cash flows will grow indefinitely beyond the explicit projection period. It's typically a modest rate, often aligned with the long-term inflation rate or GDP growth rate of the economy.

How the Calculator Works

Our DCF calculator performs the following steps:

1. Projects Future FCFs: It takes your "Initial Free Cash Flow (Year 1)" and projects FCFs for each of the "Explicit Projection Years" using the "FCF Growth Rate".
2. Discounts Projected FCFs: Each projected FCF is then discounted back to its present value using the "Discount Rate (WACC)". The sum of these present values gives you the "Present Value of Projected FCFs".
3. Calculates Terminal Value: For cash flows beyond the explicit projection period, a "Terminal Value" is calculated. This value represents the sum of all cash flows from the end of the projection period into perpetuity, growing at the "Terminal Growth Rate". The formula used is the Gordon Growth Model: TV = FCF_Year_(N+1) / (Discount Rate - Terminal Growth Rate).
4. Discounts Terminal Value: The calculated "Terminal Value" is then discounted back to the present day to get the "Present Value of Terminal Value".
5. Sums for Total Value: Finally, the "Present Value of Projected FCFs" and the "Present Value of Terminal Value" are added together to arrive at the "Total Enterprise Value (DCF)".

Example Calculation

Let's use the default values in the calculator:

• Initial Free Cash Flow (Year 1): $1,000,000
• FCF Growth Rate: 5% (0.05)
• Explicit Projection Years: 5
• Discount Rate (WACC): 10% (0.10)
• Terminal Growth Rate: 2% (0.02)

The calculator will first project FCFs for 5 years, discount them, then calculate the terminal value based on the FCF in year 6 (Year 5 FCF * (1 + Terminal Growth Rate)), discount that terminal value back to the present, and sum everything up to give you the total enterprise value.

For instance, Year 1 FCF is $1,000,000. Its PV is $1,000,000 / (1.10)^1 = $909,090.91. Year 2 FCF is $1,000,000 * 1.05 = $1,050,000. Its PV is $1,050,000 / (1.10)^2 = $867,768.60, and so on.

Limitations of DCF

While powerful, DCF has limitations:

• Sensitivity to Inputs: Small changes in growth rates, discount rates, or terminal growth rates can significantly alter the final valuation.
• Forecasting Difficulty: Accurately forecasting future cash flows, especially for high-growth or early-stage companies, is challenging.
• Terminal Value Reliance: The terminal value often accounts for a large portion (50-80%) of the total DCF value, making the valuation highly dependent on its assumptions.

Despite these challenges, DCF remains a cornerstone of financial analysis, providing a robust framework for understanding the intrinsic value of an investment.