Discounted Cash Flow Calculator

A discounted cash flow valuation states that an asset is worth the cash it will produce, adjusted for when that cash arrives and how uncertain it is. The model here grows an initial cash flow at a constant rate g over an explicit forecast horizon, divides each year by one plus the discount rate raised to that year, and adds a terminal value representing everything beyond the horizon. The terminal figure uses the Gordon growth form, final year cash flow multiplied by one plus the perpetual growth rate, divided by the discount rate minus that growth rate. This expression only converges when the discount rate exceeds the perpetual growth rate, which is why the calculator returns nothing otherwise. The discount rate normally comes from the weighted average cost of capital, blending an after-tax cost of debt with a cost of equity typically estimated from the capital asset pricing model as a risk-free rate plus beta multiplied by an equity risk premium. Mature listed companies commonly land between 7 and 12 percent; early-stage ventures far higher. The perpetual growth rate should be no greater than long-run nominal economic growth, in practice around 2 to 3 percent, since a firm growing faster than the economy forever would eventually become the economy. Two structural cautions apply. Terminal value routinely accounts for 60 to 80 percent of the total, so the valuation largely reflects assumptions beyond the forecast window, and the cash flow discounted must be genuinely free - after tax, capital expenditure and working capital movements - or the result overstates value.

Discounting is far older than corporate finance. Compound interest tables were published by Simon Stevin in the sixteenth century, and by the nineteenth century present-value arithmetic was routine in bond pricing, life insurance and railway engineering economics, where analysts compared construction outlays against future operating savings. Irving Fisher supplied the modern theoretical frame in The Rate of Interest in 1907 and The Theory of Interest in 1930, arguing that the value of any asset is the discounted stream of income it yields and that investment decisions should be made by comparing present values. Application to securities came with John Burr Williams, whose 1938 book The Theory of Investment Value proposed that a common stock is worth the present value of its future dividends, an argument that displaced valuation based purely on book assets or recent earnings. Myron Gordon and Eli Shapiro published the constant-growth simplification in 1956, giving the perpetuity formula used for terminal value here, and Gordon developed it further in his 1962 work on corporate investment and financing. Joel Dean Capital Budgeting in 1951 pressed corporations to adopt present-value methods over payback and accounting rate of return. The final ingredient, a principled discount rate, arrived with the capital asset pricing model developed independently by William Sharpe, John Lintner and Jan Mossin in the mid-1960s. Aswath Damodaran at New York University has since become the most widely cited practitioner source for the input data these models require.