DCF — Discounted Cash Flow Valuation — Smart Financial Analysis
DCF is the gold standard of valuation — Warren Buffett calls it 'the only method that makes sense.' Value any asset by the present value of its future cash flows.
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DCF is the gold standard of valuation — Warren Buffett calls it. DCF is intrinsic (based on your own cash flow projections) while multiples (P/E, EV/EBITDA) are relative (based on comparable companies). Gordon Growth: TV = CF_n × (1+g) / (r-g), assuming perpetual growth at rate g. WACC (Weighted Average Cost of Capital) is the discount rate for enterprise DCF.
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Why: DCF is the gold standard of valuation — Warren Buffett calls it
How: Enter Initial Investment ($), Discount Rate / WACC (%), Projection Years to get instant results. Try the preset examples to see how different scenarios affect the outcome, then adjust to match your situation.
Run the calculator when you are ready.
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DCF Inputs
Projected Cash Flows ($)
For educational purposes only — not financial advice. Consult a qualified advisor before making decisions.
💡 Money Facts
DCF — Discounted Cash Flow Valuation analysis is used by millions of people worldwide to make better financial decisions.
— Industry Data
Financial literacy can increase household wealth by up to 25% over a lifetime.
— NBER Research
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Globally, only 33% of adults are financially literate, making tools like this essential.
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DCF: The Gold Standard of Valuation
DCF is the gold standard of valuation — Warren Buffett calls it "the only method that makes sense." It reduces any asset to the present value of its future cash flows. Apple's $3 trillion valuation implies specific expectations about future cash flows. When Tesla traded at 200x earnings, the DCF showed investors were pricing in 40%+ annual growth for 10+ years.
Terminal Value: Gordon Growth Model
Terminal value captures all cash flows beyond the forecast period. Gordon Growth assumes perpetual growth at rate g:
Where CF_n = final year cash flow, g = terminal growth rate, r = discount rate (WACC). Terminal value often represents 60-80% of total DCF value.
The formula derives from a perpetuity: value = CF / (r−g). The (1+g) factor grows the final year CF to the first year of the terminal period. For stable companies, g is typically 2-3% (near long-term GDP).
Sensitivity Analysis
A 1% change in WACC or terminal growth can move value 10-15%. High-growth companies (Tesla, biotech) are especially sensitive. Always run multiple scenarios — base, bull, bear — and triangulate with multiples.
| Input | Typical Range | Impact on Value |
|---|---|---|
| WACC | 9-12% | +1% WACC ≈ −10 to −15% value |
| Terminal growth | 2-4% | +0.5% g ≈ +10 to +20% value |
| Revenue growth | Varies | High-growth firms: very sensitive |
WACC in DCF
WACC (Weighted Average Cost of Capital) is the discount rate for enterprise DCF. Typical range: 9-12% for large caps. Higher WACC = lower valuation. Damodaran (NYU) publishes industry WACC estimates.
WACC = (E/V × Re) + (D/V × Rd × (1−Tc)). E = equity value, D = debt, V = E+D, Re = cost of equity, Rd = cost of debt, Tc = tax rate.
Gordon Growth vs Exit Multiple
Gordon Growth: TV = CF_n × (1+g)/(r−g). Exit Multiple: TV = EBITDA_n × multiple. Gordon is theoretically cleaner; Exit Multiple is common in M&A. Use both and compare.
Gordon Growth
Assumes perpetual growth. Best when company reaches steady state. g should not exceed long-term GDP.
Exit Multiple
TV = EBITDA × 8x (e.g.). Market-based. Common in PE and M&A. Use comparable transaction multiples.
How to Use This DCF Calculator
- Enter initial investment (use 0 for pure valuation; use current price to see if over/undervalued)
- Set discount rate (WACC) — 9-12% for large caps, higher for riskier firms
- Set projection years (typically 5-10)
- Set terminal growth (2-3% for mature firms, up to 4% for high-growth)
- Enter projected cash flows for each year
- Review NPV, enterprise value, and charts
DCF Limitations
- Highly sensitive to inputs — garbage in, garbage out
- Terminal value dominates (60-80%) — relies on perpetual growth
- Hard to forecast 5-10 years out
- Does not capture optionality or strategic value
Berkshire Hathaway letters emphasize that DCF is the right framework, but the difficulty lies in estimating future cash flows. Use conservative assumptions and triangulate with other methods.
DCF by the Numbers
❓ FAQ
See the FAQ section above for discounted cash flow, DCF vs multiples, terminal value methods, WACC, sensitivity analysis, and limitations.
📚 Sources
Disclaimer: This calculator is for educational purposes only. Not investment advice. DCF results depend heavily on inputs; always validate assumptions.
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