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DCF sensitivity analysis: how WACC and terminal growth move valuation

Use this guide when a single DCF output looks too precise. It shows how to build a WACC vs terminal growth grid, choose defensible ranges, and judge whether a valuation is robust enough to use in a decision.

Updated 2026-03-31
Best for

Finance teams, founders, and investors testing whether a DCF conclusion stays intact once key assumptions move.

Decision

Whether valuation is robust enough to use in a real decision or too fragile to trust at a single point estimate.

Use it when

A headline DCF output looks precise, but the real risk sits in the discount-rate and terminal-growth range.

Reviewed by

MetricKit editorial review for valuation sensitivity analysis.

Reviewed to keep the sensitivity workflow tied to defensible input ranges rather than a decorative spreadsheet heatmap.

Try it in a calculator

DCF Sensitivity Calculator
Example: $5M FCF, 5 years @ 15% growth, base 12% discount +/-2%, base 3% terminal +/-1%
Start with a base-case DCF, then stress the same WACC and terminal growth assumptions stakeholders will challenge.

Why sensitivity matters

Use sensitivity analysis when the decision matters more than the headline valuation. A DCF can look precise while the answer is still fragile, so the real question is how valuation changes when WACC and terminal growth move inside a defensible range.

How to run DCF sensitivity (step-by-step)

  • Start with your base-case DCF (FCF forecast, discount rate, terminal growth).
  • Pick a range for discount rate (r) and terminal growth (g).
  • Recalculate value for each r/g pair to build a grid.
  • Compare how far valuations move from the base case.

How to pick ranges

  • Discount rate: start with WACC as a base, then test +/-1-3%.
  • Terminal growth: test conservative long-run rates (often 0-4% depending on context).
  • If terminal dominates EV, consider extending the forecast or making assumptions more conservative.

DCF sensitivity example

If your base case uses a 12% discount rate and 3% terminal growth, test 10-14% for discount rate and 2-4% for terminal growth. A stable valuation across the grid signals robustness.

How to read the grid

  • Look for stability: if value swings wildly, the conclusion is fragile.
  • Use the base case as a reference point, not as the only outcome.
  • Check whether the same story holds across reasonable rate and growth pairs.

Common traps

  • Terminal growth >= discount rate (invalid in perpetuity model).
  • Picking a range that's too narrow and creating false confidence.
  • Using accounting earnings instead of cash flow for valuation.

Modeling checklist

  • Keep units consistent (annual cash flows with annual discount rates).
  • Reconcile terminal value to a reasonable share of total EV.
  • Run sensitivity on margin and reinvestment if they drive FCF.

FAQ

Why does EV change so much when discount rate moves 1%-
Discounting compounds over time and terminal value is sensitive to (r - g). Small changes can meaningfully affect present value, especially for long-duration cash flows.
Is a 3*3 grid enough-
It's a quick sanity check. For important decisions, expand to more scenarios and also test key operating assumptions (margin, reinvestment, growth fade).

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A practical guide to WACC: what it is, how to compute it, and how to use it (carefully) as a DCF discount rate.
Discount rate: how to choose it for NPV and DCF
A practical guide to discount rates: what they mean, how to choose a rate (WACC vs MARR), and how to avoid common mistakes.
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