DCF Valuation: Discounted Cash Flow Model Steps and Example
DCF (Discounted Cash Flow) values a company by projecting future cash flows and discounting them back to present value.
DCF Steps
- Project Free Cash Flows (5-10 years)
- Determine terminal value
- Discount using WACC
- Calculate enterprise value
1. Project Free Cash Flows
FCF = EBIT × (1-Tax) + D&A - CapEx - Working Capital
2. Terminal Value
Perpetuity Growth Method:
TV = Final FCF × (1 + g) / (WACC - g)
Where g = perpetual growth rate (typically 2-3%)
3. Discount to Present Value
PV = FCF / (1 + WACC)^n
4. Calculate Enterprise Value
EV = Sum of PV(FCFs) + PV(Terminal Value)
Example
| Year 1 FCF | $1,000,000 |
| Year 2 FCF | $1,100,000 |
| Year 3 FCF | $1,200,000 |
| Terminal Value | $15,000,000 |
| WACC | 10% |
| Enterprise Value | $14,200,000 |
Key Assumptions
- WACC (discount rate)
- Growth rate
- Capital expenditures
- Working capital needs
