Discounted Cash Flow Calculator

What a future dollar is worth today

Here is a question that sits underneath almost all of finance. Would you rather have 1,000 dollars now, or 1,000 dollars in ten years? Everyone picks now, and for good reasons: you could invest the money in the meantime, inflation will nibble at it, and the future promise might not be kept at all. So a dollar arriving later is worth less than a dollar in your hand today.

Discounted cash flow takes that instinct and makes it arithmetic. It projects the money something will produce in the years ahead, then shrinks each of those future amounts back to what it is worth right now, and adds them up. The total is an estimate of what the thing is worth today, based on nothing but the cash it is expected to throw off. This calculator runs that process across two phases, a fast-growing stretch followed by a slower one.

Describing the two phases

Current value is your starting figure, the amount being produced today. The tool grows this before counting it, so the first amount it values is next year's, not this year's.

Discount rate is the rate you shrink future money by. It stands for the return you could get elsewhere and the risk you are taking, and it is the single most consequential number on this page.

Then the first phase: growth rate and growing over, which set how fast the figure climbs and for how many years. This is the stretch you feel able to forecast with a straight face, often three to five years, sometimes ten.

Then the second: terminal rate and terminal rate over, a slower growth rate for the years beyond your confident forecast. Nothing grows quickly forever, so this phase is where you let the pace settle down to something modest and sustainable.

Three numbers, and why the split matters

The growth phase present value is the sum of each forecast year's amount, shrunk back to today. The terminal value present value is what the second phase is worth in today's money. The total present value is the two added together, your valuation.

Keeping those first two apart is more useful than it looks. Your forecast years rest on things you can reason about, while anything beyond them is a guess about a distant future. Seeing how much of your total leans on each half tells you how speculative your answer really is. If most of the value sits in the far horizon, you are not valuing a business so much as betting on one.

The engine: discounting, year by year

Every future amount gets divided by the discount rate compounded over the years until it arrives:

present value = future amount / (1 + discount rate)years away

The exponent is what gives discounting its bite. At a 10 percent discount rate, money arriving next year keeps about 91 percent of its face value. Five years out, about 62 percent. Ten years out, roughly 39 percent. Distant money is not gently reduced, it is steadily crushed, and that is deliberate, because a promise ten years away deserves far less weight than one next year.

So the tool walks forward year by year, growing your figure and discounting each year's result, then adds the terminal piece on the end.

A worked example, laid out year by year

Take a business producing 100,000 dollars a year. You expect 8 percent growth for 5 years, then a slower 3 percent for 5 more, and you are discounting at 10 percent.

Notice how the two columns pull apart. The amount produced climbs steadily, but its value today barely moves, and then starts drifting down. Growth is pushing up while discounting is pushing back, and by year five the discounting is winning.

Those five years add up to a growth phase present value of about 473,379. The terminal phase then carries that year-five figure forward at 3 percent, reaching about 170,335 by year ten, which is worth roughly 65,672 in today's money. Add them and the total present value is about 539,051.

How this model handles the far future

This is worth explaining properly, because it shapes how you read the answer.

In the growth phase, the tool treats your figure as money arriving every single year, and values each of those years. In the terminal phase it does something different. It takes your final forecast year, grows it at the terminal rate across the terminal years, and values that one closing amount. So the terminal figure behaves like a single sum at the end of the horizon, the sort of number you would think about if you expected to sell the thing at that point, rather than a stream continuing forever.

That gives this calculator a defined finish line, which suits anything with a natural end: a project, a lease, a patent, a contract, a business you plan to exit. It also has a quiet advantage. The classic textbook approach values the far future as a perpetuity running to infinity, and in those models the terminal value typically ends up carrying 60 to 80 percent of the entire valuation, which means most of the answer rests on the most speculative assumption in the model. In our example above, the terminal piece is only about 12 percent of the total. Far more of the answer comes from years you actually forecast.

The trade is that if you are valuing a business you expect to run indefinitely, a finite horizon will give you a more conservative figure than the perpetuity method would. So read the total as the value of the cash over the horizon you described, and if you want to reflect a longer life, extend the terminal years rather than expecting one number to stand in for forever.

The discount rate is where the real argument is

Every valuation dispute you will ever see comes down to assumptions, and the discount rate is usually the biggest one. Change nothing but that number in our example and watch the answer move. At 8 percent, the total is about 578,898. At 10 percent, about 539,051. At 12 percent, about 503,756. A four-point spread in one input swings the valuation by roughly 75,000, and no one can prove which of those rates is correct.

Growth does the same thing. Nudge the growth rate from 6 to 10 percent and the total climbs from about 507,840 to about 571,982. This is why the phrase "garbage in, garbage out" follows discounted cash flow around, and why a determined analyst can nearly always nudge a model toward the answer they wanted, with every calculation still perfectly correct.

None of that makes the method worthless. It makes it a tool for thinking rather than an oracle. The professional habit is to run the model several times across a range of rates and growth assumptions, and to treat the spread as the answer instead of any single figure. Used that way, the real value of a discounted cash flow is not the number it prints, it is the clarity about what you would have to believe for a price to make sense. If you need a defensible discount rate for the equity side, the Cost of Equity Calculator is the natural next stop.

Questions people ask

What discount rate should I use?

It should reflect the return available elsewhere and the risk of the cash flows. Businesses commonly use their weighted average cost of capital, and for equity specifically, the cost of equity. Riskier and less certain cash flows deserve a higher rate. Since the answer moves a lot with this input, test a range rather than committing to one number.

What should the terminal rate be?

Something modest and sustainable, since no business outgrows the whole economy forever. Long-run figures of around 2 to 3 percent, in line with general economic growth, are the usual anchor. A high terminal rate quietly implies the business eventually swallows its own market.

What figure should I put in as the current value?

Whatever cash the thing actually produces in a year, such as free cash flow for a business or net income for a simpler case. Just keep it consistent, since a value built on cash flows and a value built on profits are answering slightly different questions.

How much should I trust the result?

Treat it as one estimate among several, not a verdict. Small changes in the discount rate or growth rate move the answer substantially, so the sensible use is to run a range of scenarios and see how wide the answer gets before you decide anything.

References

The discounting math is standard corporate finance. The guidance on discount rates, terminal assumptions, and the model's sensitivity comes from the sources below.

1. Damodaran, A. Discounted Cash Flow Valuation, Stern School of Business, New York University (discount rate estimation, terminal value, and common valuation errors). pages.stern.nyu.edu
2. Brealey, R. A., Myers, S. C., and Allen, F. Principles of Corporate Finance (present value, discounting, and valuing a business). McGraw-Hill.