A Simple Ten-Year Discounted Cash Flow (DCF) Calculator

By Stock Research Pro • April 10th, 2011

Discounted Cash Flow or “DCF” is a process for measuring the value of a stock (or another type of investment) by adding the discounted present values of future cash flows. Free cash flow (FCF) projections are most commonly used in DCF analysis since it represents the money available to the company to pursue investment and expansion projects that can increase shareholder value. Because DCF forces an investor to consider the future performance of a company, it is considered to be a highly effective tool in making valuation assessments.

Advantages of DCF Analysis

Discounted cash flow analysis is a fundamental approach to stock picking that operates with sound logic but (like any valuation approach) relies on good data to deliver an accurate result. Many experienced investors like the DCF approach because it is forward-looking. So, rather than try to predict a future value based on past company performance, it utilizes expected cash flows in determining value. In focusing on cash flows, the DCF approach minimizes the impact of accounting methods and assumptions.

Disadvantages to DCF Analysis

To provide an accurate valuation, the DCF approach depends greatly on the precision of the projections regarding free cash flow. Because of this, DCF valuations are often expressed in ranges and multiple valuations may be presented to demonstrate differing scenarios. It is important for the investor to be completely objective regarding the data that is input.

Arriving at a Discount Rate

In addition to providing accurate estimates of future free cash flow, the investor needs to apply a discount rate in order to discount these future dollars down to present values. Perhaps the most popular method for arriving at a discount rate is the Weighted Average Cost of Capital (WACC). You can click here to launch a WACC calculator.

Applying a Terminal Value

The calculator below provides a simple ten-year DCF valuation without regard to terminal value. Terminal value represents the value of the investment at the end of the time period having applied a specific interest rate. Click here to learn more about and calculate terminal value.


The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.

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