Make the distant assumptions visible.
DCF values operating assets by discounting free cash flow to the firm at a rate appropriate to that cash flow. FCFF is after operating tax and necessary reinvestment but before debt financing flows; using EBITDA or equity cash flow with WACC mixes incompatible quantities.
The terminal value often dominates the result for a young company. A modest change in the discount rate or perpetual growth rate can materially alter value. This model exposes five annual cash flows and the terminal contribution instead of hiding them behind a revenue-growth input.
The formula, made clear.
- FCFF
- After-tax operating cash flow after capital expenditure and working-capital reinvestment, before interest or debt principal.
- WACC
- Discount rate matched to operating cash-flow risk, currency and inflation basis.
- Terminal value
- Value at the end of year five of cash flows growing perpetually at g; requires g < WACC.
Put the numbers in context.
At 15% WACC and 3% perpetual growth, $1,500,000.00 year-five FCFF produces $12,875,000.00 terminal value at year five. That terminal value is discounted back five years and added to the present value of the five explicit cash flows.
| Input | Example value |
|---|---|
| Year 1 free cash flow to firm | -$500,000.00 |
| Year 2 free cash flow to firm | $0.00 |
| Year 3 free cash flow to firm | $500,000.00 |
| Year 4 free cash flow to firm | $1,000,000.00 |
| Year 5 free cash flow to firm | $1,500,000.00 |
| Discount rate / WACC | 15% |
| Perpetual nominal growth | 3% |
| Non-operating cash | $500,000.00 |
| Debt and senior claims | $1,000,000.00 |
| Discounted operating enterprise value | $7,612,644.32 |
What this calculation assumes
Five end-of-year nominal FCFF values; a nonnegative sustainable year-five base; perpetual growth below WACC. No midyear convention, failure probability, changing capital structure or automatic reinvestment calibration. The equity bridge is unfloored.
Methodology references
What to consider next.
Compare terminal value with an exit-multiple cross-check, and stress the discount rate and terminal assumptions. Model funding needed to survive the negative cash-flow years separately.
How we approach financial models →