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DCF valuation: forecast cash flows, discount rate, and terminal value

A practical guide to DCF valuation and WACC discount rate choices: how to forecast FCF, choose a discount rate, and avoid terminal value traps.

Written by MetricKit EditorialReviewed by MetricKit Editorial ReviewUpdated 2026-02-22
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Best for

Finance teams, operators, and investors building a first-pass intrinsic valuation model.

Decision

Whether forecast cash flows support a defensible valuation range before you move into sensitivity work.

Use it when

You need a base-case DCF and want the forecast, discount-rate, and terminal-value logic spelled out cleanly.

Reviewed by

MetricKit editorial review for valuation modeling.

Reviewed to keep the base-case DCF flow consistent with the linked WACC, terminal-value, and equity-value guidance.

Try it in a calculator

DCF Valuation Calculator
Example: $5M FCF, 5 years, 15% growth, 12% discount, 3% terminal growth
Opens the calculator with this scenario

What DCF is doing

A DCF values a business by taking expected future free cash flows and discounting them back to present value. Because businesses last beyond the explicit forecast period, DCFs typically add a terminal value that represents cash flows after the forecast horizon.

DCF formula (NPV of cash flows + terminal value)

Enterprise value = sum(FCF_t / (1 + r)^t) + terminal value / (1 + r)^n.

How to calculate DCF (step-by-step)

  • Forecast free cash flow (FCF) for each year in the explicit period.
  • Choose a discount rate that matches the risk (often WACC as a proxy).
  • Discount each year's FCF back to present value.
  • Compute terminal value (perpetual growth or exit multiple).
  • Discount terminal value back to present value and sum with forecast PVs.
  • Adjust enterprise value to equity value using net debt and other claims.

Key inputs and how to choose them

  • Free cash flow (FCF): cash available after operating costs and reinvestment (capex/working capital).
  • Forecast growth: should fade over time toward a mature level.
  • Discount rate: risk-adjusted required return (WACC as a common proxy).
  • Terminal growth: conservative long-run growth, lower than discount rate.

Terminal value pitfalls

  • Terminal dominates EV: run sensitivity (r, terminal growth).
  • Terminal growth >= discount rate: mathematically invalid in perpetuity model.
  • Using aggressive terminal growth: implies implausible long-run scale.

Practical checklist

  • Build base/optimistic/conservative scenarios.
  • Separate unit economics vs macro assumptions (margin, reinvestment).
  • Cross-check DCF with multiples as a sanity check (not a substitute).

FAQ

Why does the DCF change so much with small discount rate moves-
Discounting compounds over time, and terminal value is very sensitive to (r - g). Small changes in r or terminal growth can meaningfully change EV, which is why sensitivity analysis is essential.
Is this a full valuation model-
It's a simplified enterprise value estimate. A full model would adjust to equity value using net debt and model reinvestment more explicitly (capex, working capital, taxes).

More in finance

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.
NPV vs IRR: which metric to trust (and the traps)
A practical guide to NPV vs IRR: why IRR can mislead, when NPV is superior, and how to compare projects with different scale and timing.
IRR (Internal Rate of Return): definition, formula, and how to use it
IRR explained: what internal rate of return means, how to calculate IRR, and when IRR can be misleading (use NPV too).
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