Discounted Cash Flow Calculator
This DCF calculator allows you to compute the Discounted Present Value (DPV) of an investment using a Discounted Cash Flow (DCF) analysis. The calculator includes adjustments for both the growth phase and terminal phase of the investment.
Using the Discounted Cash Flow calculator
Our online Discounted Cash Flow (DCF) calculator helps you calculate the intrinsic value of an investment by considering future cash flows. The calculator is appropriate when future conditions are variable, and there are distinct periods of rapid growth followed by slow and steady terminal growth.
To use the calculator, first enter the initial investment, price per share, or purchasing price. Then enter the discount rate, which is usually the Weighted Average Cost of Capital (WACC) for business valuation or the “risk-free rate” for other types of investments, such as the return from T-bonds. Next, enter the expected average growth rate and the period over which the investment is expected to experience this growth. Finally, enter the terminal rate and the period over which you expect the investment to increase at significantly reduced rates.
The calculator will output the Growth Discounted Present Value, Terminal Discounted Present Value, and the sum of the two values, the Total Discounted Present Value. These are the outputs of the DCF model, which provide an estimate of the intrinsic value of an investment based on its future cash flows.
What is Discounted Cash Flow analysis?
Discounted Cash Flow (DCF) is a method for estimating the value of a business, project, company or asset, based on the time value of money concept. This method discounts future cash flows to present value using the cost of capital, in order to arrive at a discounted present value (DPV). The goal is to estimate the value an investor would receive adjusted by the risk-free rate of an alternative available investment. If the present value estimate is higher than the present-day cost of the investment, it makes the project worth considering.
For example, consider that $100 put into a savings account today will be worth $105 a year from now (5% interest assumed), but if using these $100 is delayed for a year, it would be worth only $95 as it could not be put into the savings account.
DCF is useful when one can control and forecast with reasonable accuracy and is used in investment finance, real estate development, corporate financial management, as well as patent valuation in court cases. However, it is important to keep in mind that the method is only as accurate as the inputs and assumptions used, thus “garbage in, garbage out” applies.
DCF has some limitations, such as not supporting a variable discount rate or changing cost of capital, and it does not account for the cyclical nature of markets. Therefore, the average return during both the growth stage and terminal stage can be widely inaccurate given significant market fluctuations.
DCF formula
The calculation of the Discounted Present Value (DPV) is a financial analysis method that uses the Discounted Cash Flow (DCF) model. The DCF model estimates the intrinsic value of an investment based on its future cash flows, and takes into account the time value of money. To calculate the DPV, you need to know the formulas for the discounted cash flow, future value and DPV.
To calculate the discounted cash flow, you can use the formula:
DCF = CFt / (1 + r)^t
Where CFt is the cash flow in period t, r is the discount rate and t is the time period.
To calculate the future value, you can use the formula:
FV = PV * (1 + r)^t
Where PV is the present value, r is the interest rate, and t is the number of periods.
Finally, to calculate the DPV, you need to calculate the present value of all future cash flows and sum them up. You can use the formula:
DPV = ∑t=1n(DCFt / (1 + r)^t)
Where DCFt is the discounted cash flow in period t, r is the discount rate and t is the time period.
You can use the above formulas to manually calculate the DPV or use an Excel spreadsheet with built-in functions such as the NPV function to automate the calculation.