What a DCF actually values
A DCF computes the present value of all the cash a business will throw off in the future, discounted back to today at the cost of the capital used to finance it. Conceptually it's the cleanest valuation method — it doesn't depend on whatever multiples the public market is paying today, only on the company's own fundamentals.
In practice, the inputs that drive a DCF (growth, margins, capex, WACC, terminal growth) are uncertain enough that the "clean" method gives a range of $100M-$300M for a business that's probably worth $180M. The DCF is most useful as a triangulation against multiples-based methods (comps, transactions) rather than a standalone answer.
The 5-year explicit period plus terminal
The standard structure projects unlevered free cash flow line by line for 5 years (the "explicit period"), then captures everything after Year 5 in a single Gordon Growth terminal value. The 5-year cutoff is convention, not law — it's the period long enough to forecast meaningful change but short enough that analyst estimates aren't pure fiction.
Each projection year computes unlevered free cash flow as:
UFCF = (EBITDA − D&A) × (1 − tax) + D&A − CapEx
NOPAT (the first term, with EBITDA-minus-D&A times one-minus-tax) is operating income after taxes — what the business would generate if it had no debt. Adding back D&A and subtracting CapEx converts NOPAT into the cash actually available to all capital providers. Discount each year's UFCF at 1 / (1 + WACC)^t and you have the present value of the explicit forecast period.
The terminal value problem
The terminal value typically represents 60-80% of total enterprise value in a 5-year DCF. The calculator above shows this directly — the "TV % of EV" output line. If your terminal is over 80%, your DCF is mostly an opinion about steady-state economics, with the explicit forecast contributing very little. That's fine if you have high conviction on terminal margins and growth; it's a problem if the terminal inputs are just plugs.
Gordon Growth computes terminal value as:
TV = UFCF_year5 × (1 + g) / (WACC − g)
The math implies a few non-obvious things:
- Terminal growth must be less than WACC. If terminal growth equals or exceeds WACC, the formula breaks (or produces nonsense). The calculator returns no result in that case — a forcing function to keep g below WACC.
- Terminal growth should rarely exceed long-run GDP. A business can't grow faster than the economy forever without eventually being the economy. 2-3% is normal; 4% is stretching it; 5% requires a story.
- Small WACC-g spreads explode terminal value. A 10% WACC and 3% terminal growth gives a denominator of 7%; drop WACC to 8% and the denominator becomes 5%, raising terminal value by 40% with no other input changing. WACC is the most sensitive input in any DCF — sensitize it.
Where DCFs go wrong
1. Terminal CapEx = D&A is rarely true
Many textbook DCFs assume CapEx equals D&A in the terminal year, which simplifies terminal UFCF to just NOPAT. That assumption is fine for a mature, steady-state business; it's wrong for a growth company where ongoing CapEx exceeds D&A by a meaningful margin. The calculator above uses the same UFCF formula for the terminal year as for projection years, so if you forecast 15% CapEx and 8% D&A in Year 5, that gap carries through. Be honest about whether your terminal year is actually steady-state.
2. Implied terminal exit multiple is unsanity-checked
Always cross-check your terminal value against an implied exit multiple: TV ÷ terminal year EBITDA. If your DCF implies an 18x EBITDA terminal exit for a midstream company that trades at 8x, your terminal growth assumption is too high or your WACC is too low. The calculator's EV/EBITDA output line is the implied current multiple — use the math above to back into the implied terminal multiple separately.
3. WACC drift across the projection
A growing business often becomes less risky as it scales — lower beta, more debt capacity, lower cost of capital. A textbook DCF uses a single WACC for all years, which under-values that transition. Sophisticated DCFs use a phased WACC (higher early, lower in steady state) and discount each year at its phase appropriate rate. The simplification of a single WACC is acceptable for a first pass; for an IC submission, walk through the WACC by stage.
When this calculator is enough — and when it isn't
For a quick triangulation of a comp-based valuation, this is enough. Plug in revenue, growth, margins, WACC, and terminal growth; see whether the DCF lands within 20% of the comp range. If it does, you have a consistent valuation story. If it doesn't, one of the methods has an assumption you need to revisit.
What this calculator omits: revenue line-item modeling (mix shift, customer cohort decay, churn), working capital changes, segment- level forecasts, stock-based compensation, NOLs, minority interests, preferred equity in the bridge, mid-year convention, and multi-scenario sensitivity. For a real model you want all of those — and the All-in-One model below has them in a clean three-statement structure with the DCF tab feeding off the operating forecast.