Calculation of Discounted Cash Flow

Discounted Cash Flow (DCF) Calculator

Results:

Present Value of Explicit Cash Flows: $0.00

Terminal Value: $0.00

Present Value of Terminal Value: $0.00

Total Enterprise Value (DCF Valuation): $0.00

function calculateDCF() { var initialCashFlow = parseFloat(document.getElementById('initialCashFlow').value); var cashFlowGrowthRate = parseFloat(document.getElementById('cashFlowGrowthRate').value) / 100; var forecastYears = parseInt(document.getElementById('forecastYears').value); var discountRate = parseFloat(document.getElementById('discountRate').value) / 100; var terminalGrowthRate = parseFloat(document.getElementById('terminalGrowthRate').value) / 100; // Input validation if (isNaN(initialCashFlow) || initialCashFlow <= 0) { alert("Please enter a valid positive number for Year 1 Free Cash Flow."); return; } if (isNaN(cashFlowGrowthRate) || cashFlowGrowthRate < -1) { // Growth rate can be negative, but not less than -100% alert("Please enter a valid number for Annual Growth Rate of Free Cash Flow."); return; } if (isNaN(forecastYears) || forecastYears 20) { alert("Please enter a valid number of Explicit Forecast Years (1-20)."); return; } if (isNaN(discountRate) || discountRate = discountRate) { alert("Please enter a valid Perpetual Growth Rate. It must be less than the Discount Rate."); return; } var pvExplicitCashFlows = 0; var lastExplicitCashFlow = initialCashFlow; // Calculate Present Value of Explicit Cash Flows for (var i = 1; i <= forecastYears; i++) { var currentCashFlow = lastExplicitCashFlow * (1 + cashFlowGrowthRate); pvExplicitCashFlows += currentCashFlow / Math.pow(1 + discountRate, i); lastExplicitCashFlow = currentCashFlow; } // Calculate Terminal Value var terminalValue = (lastExplicitCashFlow * (1 + terminalGrowthRate)) / (discountRate – terminalGrowthRate); // Calculate Present Value of Terminal Value var pvTerminalValue = terminalValue / Math.pow(1 + discountRate, forecastYears); // Calculate Total Enterprise Value var totalEnterpriseValue = pvExplicitCashFlows + pvTerminalValue; // Display results document.getElementById('pvExplicitCashFlows').innerText = '$' + pvExplicitCashFlows.toFixed(2).replace(/\B(?=(\d{3})+(?!\d))/g, ","); document.getElementById('terminalValue').innerText = '$' + terminalValue.toFixed(2).replace(/\B(?=(\d{3})+(?!\d))/g, ","); document.getElementById('pvTerminalValue').innerText = '$' + pvTerminalValue.toFixed(2).replace(/\B(?=(\d{3})+(?!\d))/g, ","); document.getElementById('totalEnterpriseValue').innerText = '$' + totalEnterpriseValue.toFixed(2).replace(/\B(?=(\d{3})+(?!\d))/g, ","); } // Run calculation on page load with default values window.onload = calculateDCF; .calculator-container { font-family: 'Segoe UI', Tahoma, Geneva, Verdana, sans-serif; background-color: #f9f9f9; padding: 25px; border-radius: 10px; box-shadow: 0 4px 12px rgba(0, 0, 0, 0.1); max-width: 600px; margin: 30px auto; border: 1px solid #e0e0e0; } .calculator-container h2 { text-align: center; color: #2c3e50; margin-bottom: 25px; font-size: 1.8em; } .form-group { margin-bottom: 18px; display: flex; flex-direction: column; } .form-group label { margin-bottom: 8px; color: #34495e; font-size: 1em; font-weight: 600; } .form-group input[type="number"] { padding: 12px; border: 1px solid #ccc; border-radius: 6px; font-size: 1.1em; width: 100%; box-sizing: border-box; transition: border-color 0.3s ease; } .form-group input[type="number"]:focus { border-color: #007bff; outline: none; box-shadow: 0 0 0 3px rgba(0, 123, 255, 0.25); } .calculate-button { display: block; width: 100%; padding: 14px; background-color: #007bff; color: white; border: none; border-radius: 6px; font-size: 1.2em; font-weight: 700; cursor: pointer; transition: background-color 0.3s ease, transform 0.2s ease; margin-top: 25px; } .calculate-button:hover { background-color: #0056b3; transform: translateY(-2px); } .calculate-button:active { transform: translateY(0); } .calculator-results { margin-top: 30px; padding-top: 25px; border-top: 1px solid #eee; } .calculator-results h3 { color: #2c3e50; margin-bottom: 15px; font-size: 1.5em; text-align: center; } .calculator-results p { display: flex; justify-content: space-between; padding: 10px 0; border-bottom: 1px dashed #eee; font-size: 1.1em; color: #34495e; } .calculator-results p:last-child { border-bottom: none; font-weight: 700; color: #007bff; font-size: 1.2em; margin-top: 10px; } .calculator-results p span { font-weight: 600; color: #2c3e50; } .calculator-results p:last-child span { color: #0056b3; }

Understanding the Discounted Cash Flow (DCF) Valuation 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. It operates on the principle 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, as it provides an intrinsic value based on fundamental financial projections rather than market sentiment.

What is Discounted Cash Flow (DCF)?

At its core, DCF analysis involves projecting a company's future free cash flows (FCF) and then discounting them back to the present using a discount rate. The sum of these present values, along with the present value of a terminal value (representing cash flows beyond the explicit forecast period), gives the estimated intrinsic value of the company or asset.

Key Components of a DCF Model:

  1. Free Cash Flow (FCF): This is the cash a company generates after accounting for cash outflows to support its operations and maintain its capital assets. It represents the cash available to all capital providers (debt and equity holders). FCF is typically projected for an explicit period, usually 5-10 years, based on revenue growth, operating margins, capital expenditures, and changes in working capital.
  2. Explicit Forecast Period: This is the period for which you explicitly project the company's free cash flows. It's usually long enough for the company to reach a stable growth rate. Our calculator allows you to specify this period in years.
  3. Cash Flow Growth Rate: During the explicit forecast period, cash flows are expected to grow. This rate reflects the company's anticipated expansion, market conditions, and competitive landscape.
  4. Discount Rate (Weighted Average Cost of Capital – WACC): The discount rate is the rate of return required by investors to compensate them for the risk of investing in the company. For a company, this is often the Weighted Average Cost of Capital (WACC), which accounts for the cost of both equity and debt, weighted by their proportion in the company's capital structure. A higher discount rate implies higher risk and results in a lower present value.
  5. Terminal Value (TV): After the explicit forecast period, it's impractical to project cash flows indefinitely. The terminal value represents the value of all cash flows beyond the explicit forecast period. It's typically calculated using a perpetuity growth model, assuming a constant, sustainable growth rate into perpetuity.
  6. Perpetual Growth Rate (Terminal Growth Rate): This is the assumed constant growth rate of free cash flows beyond the explicit forecast period. It should be a sustainable, long-term growth rate, typically not exceeding the long-term growth rate of the economy (e.g., 2-3%).

How the DCF Calculator Works:

Our calculator simplifies the DCF process by taking your key assumptions and performing the necessary calculations:

  1. Year 1 Free Cash Flow: You input the starting free cash flow for the first year of your explicit forecast.
  2. Annual Growth Rate of Free Cash Flow: This rate is applied to grow the free cash flow year-over-year for the duration of your explicit forecast period.
  3. Explicit Forecast Period: The number of years for which individual cash flows are projected and discounted.
  4. Discount Rate (WACC): This rate is used to bring all future cash flows (both explicit and terminal) back to their present value.
  5. Perpetual Growth Rate: Used in the terminal value calculation to estimate the value of cash flows beyond the explicit forecast.

The calculator then outputs:

  • Present Value of Explicit Cash Flows: The sum of the present values of each year's projected free cash flow during the explicit forecast period.
  • Terminal Value: The estimated value of all cash flows generated after the explicit forecast period.
  • Present Value of Terminal Value: The terminal value discounted back to the present day.
  • Total Enterprise Value (DCF Valuation): The sum of the Present Value of Explicit Cash Flows and the Present Value of Terminal Value, representing the intrinsic value of the company or asset.

Example Calculation:

Let's consider a hypothetical company with the following inputs:

  • Year 1 Free Cash Flow: $100,000
  • Annual Growth Rate of Free Cash Flow: 5%
  • Explicit Forecast Period: 5 Years
  • Discount Rate (WACC): 10%
  • Perpetual Growth Rate: 2%

Here's a step-by-step breakdown of how the calculator processes these values:

  1. Project Explicit Cash Flows:
    • Year 1: $100,000
    • Year 2: $100,000 * (1 + 0.05) = $105,000
    • Year 3: $105,000 * (1 + 0.05) = $110,250
    • Year 4: $110,250 * (1 + 0.05) = $115,762.50
    • Year 5: $115,762.50 * (1 + 0.05) = $121,550.63
  2. Discount Explicit Cash Flows to Present Value:
    • PV Year 1: $100,000 / (1 + 0.10)^1 = $90,909.09
    • PV Year 2: $105,000 / (1 + 0.10)^2 = $86,776.86
    • PV Year 3: $110,250 / (1 + 0.10)^3 = $82,812.50
    • PV Year 4: $115,762.50 / (1 + 0.10)^4 = $79,012.97
    • PV Year 5: $121,550.63 / (1 + 0.10)^5 = $75,374.26

    Total PV of Explicit Cash Flows: $90,909.09 + $86,776.86 + $82,812.50 + $79,012.97 + $75,374.26 = $414,885.68

  3. Calculate Terminal Value (at end of Year 5):
    • Cash Flow Year 6 (for TV): $121,550.63 * (1 + 0.02) = $123,981.64
    • Terminal Value = $123,981.64 / (0.10 – 0.02) = $123,981.64 / 0.08 = $1,549,770.50
  4. Discount Terminal Value to Present Value:
    • PV of Terminal Value = $1,549,770.50 / (1 + 0.10)^5 = $962,240.00
  5. Calculate Total Enterprise Value:
    • Total Enterprise Value = $414,885.68 (PV Explicit FCFs) + $962,240.00 (PV of TV) = $1,377,125.68

Importance and Limitations:

DCF is a powerful tool for intrinsic valuation, forcing analysts to think critically about a company's future performance and underlying drivers. However, it 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 final valuation. Therefore, the accuracy of a DCF model heavily relies on the quality and realism of the assumptions made. It's often used in conjunction with other valuation methods to provide a more comprehensive view.

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