Financial
DCF valuation formula: NPV of cash flows plus Gordon Growth Terminal Value
Calculate Enterprise Value by combining NPV of explicit forecast Free Cash Flows with discounted perpetuity Terminal Value.
Remember to discount Terminal Value back to Year 0
A two-stage Discounted Cash Flow (DCF) model sums (1) Present Value of explicit Year 1..N Free Cash Flows using NPV(WACC, FCF1:FCFn) and (2) Present Value of Terminal Value.
Gordon Growth Terminal Value FCF_n * (1 + g) / (WACC - g) values post-horizon cash flows AS OF YEAR N—so you MUST divide it by (1 + WACC)^N to bring it back to today's dollars!
| Component | Formula (WACC=10%, g=3%) | Value ($M) |
|---|---|---|
| PV of Yr 1–3 FCF (100, 120, 150) | =NPV(0.10, B2:B4) | 302.78 |
| Undiscounted TV at Yr 3 | =150 * 1.03 / (0.10 - 0.03) | 2,207.14 |
| PV of TV at Yr 0 | =2207.14 / 1.10^3 | 1,658.26 |
| Enterprise Value | =PV(FCF) + PV(TV) | 1,961.04 |
Full DCF Enterprise Value formula
Guard WACC <= g because the perpetuity formula requires DiscountRate strictly greater than PerpetualGrowth.
=IF(C2<=D2, "Invalid g>=WACC", ROUND(NPV(C2, B2:B4) + (B4 * (1 + D2) / (C2 - D2)) / (1 + C2)^ROWS(B2:B4), 2))Present Value of explicit forecast stage only
NPV discounts B2 by 1 period, B3 by 2 periods, and B4 by 3 periods.
=ROUND(NPV(C2, B2:B4), 2)Inputs and interpretation
This illustrative model uses end-of-year free cash flow to the firm and a matching annual WACC, with constant terminal growth. Require WACC > growth and both rates > -1, complete numeric cash flows, equal periods and a sustainable terminal assumption. FCFE instead requires an equity discount rate. Firm value is not equity value; debt, cash and other claims require a separate bridge. The result is a model scenario, not an observed or guaranteed price.
Try the example
Use the original values or change them to test your understanding.