DCF Valuation explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
A business is worth what its future cash will be worth today. Discounted cash flow valuation takes a forecast of the cash the business can pay out to its funders, brings each year back to today at a discount rate, adds a value for the years beyond the forecast, and arrives at what the whole business is worth. It answers the owner's question: "what is this business worth on the strength of what it can earn?"
DCF = forecast cash flow available to the firm (FCFF) for each year, discount each at the cost of capital, add a terminal value for the years after the forecast, and deduct net debt to reach equity value. Terminal value by constant growth = FCFF in the last year × (1 + g) ÷ (discount rate − g). Growth must stay below the discount rate, and in most DCFs the terminal value is the larger part of the answer, so test it.
When it fits and what data it needs
DCF suits businesses that earn steady operating cash and where a credible forecast exists: a manufacturer with an order book, a services firm with repeat customers. It fits poorly where the forecast would be a guess, or where the value sits mainly in assets. You need audited accounts for the last few years, a forecast of sales, margins, capital expenditure and working capital, the opening debt and cash, and an assumed discount rate. Law plays a part when the valuation is a legal requirement; see the law map for valuation reports.
If you want the forecast built in a proper model, with the assumptions on one sheet and the checks built in, our financial modeling service is set up for it.
The steps and the formulas
| Step | In words | In symbols |
|---|---|---|
| 1. Operating profit after tax | Operating profit less tax at an assumed rate | NOPAT = EBIT × (1 − t) |
| 2. Cash flow available to the firm | NOPAT plus depreciation, less capital expenditure, less the increase in working capital | FCFF = NOPAT + D − Capex − ΔWC |
| 3. Discount factor | One divided by one plus the rate, raised to the year number | DF = 1 ÷ (1 + r)ⁿ |
| 4. Present value | FCFF times its discount factor | PV = FCFF × DF |
| 5. Terminal value at the end of the forecast | Last-year cash flow grown once, divided by the rate less the growth rate | TV = FCFF� |
× (1 + g) ÷ (r − g) |
| 6. Enterprise value | Sum of present values plus the present value of the terminal value | EV = ΣPV + TV × DF� |
|---|---|---|
| 7. Equity value | Enterprise value less net debt | Equity = EV − (debt − cash) |
The discount rate is the weighted average cost of capital (WACC), built from the cost of equity and the cost of debt. This article takes it as an assumption; how it is derived is in the cost of capital and WACC guide. The baseline inside the cost of equity is the rate on government securities used as the baseline. For the present-value mechanics, see time value of money.
Worked example: a small packaging manufacturer
Rukmani Packaging (invented) makes corrugated cartons. All figures are in rupees lakh. Assumed inputs: tax rate 25 per cent; WACC 12 per cent; terminal growth 4 per cent; debt ₹220 lakh and cash ₹30 lakh at the valuation date. Discount factors are rounded to three decimals, present values to two decimals, and the total is the sum of the rounded lines.
Cash flow available to the firm (assumed forecast)
| ₹ lakh | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 |
|---|---|---|---|---|---|
| Operating profit (EBIT) | 120.00 | 138.00 | 156.00 | 172.00 | 186.00 |
| Tax at 25% | 30.00 | 34.50 | 39.00 | 43.00 | 46.50 |
| NOPAT | 90.00 | 103.50 | 117.00 | 129.00 | 139.50 |
| Add: depreciation | 40.00 | 42.00 | 44.00 | 46.00 | 48.00 |
| Less: capital expenditure | 70.00 | 60.00 | 55.00 | 58.00 | 60.00 |
| Less: increase in working capital | 15.00 | 14.00 | 14.00 | 12.00 | 12.00 |
| FCFF | 45.00 | 71.50 | 92.00 | 105.00 | 115.50 |
Check for year 1: 90 + 40 − 70 − 15 = 45. For year 5: 139.5 + 48 − 60 − 12 = 115.5.
Discounting at 12 per cent
| Year | FCFF | Discount factor | Present value |
|---|---|---|---|
| 1 | 45.00 | 0.893 | 40.19 |
| 2 | 71.50 | 0.797 | 56.99 |
| 3 | 92.00 | 0.712 | 65.50 |
| 4 | 105.00 | 0.636 | 66.78 |
| 5 | 115.50 | 0.567 | 65.49 |
| Total | 294.95 |
Terminal value. TV at the end of year 5 = 115.5 × 1.04 ÷ (0.12 − 0.04) = 120.12 ÷ 0.08 = ₹1,501.50 lakh. Its present value is 1,501.50 × 0.567 = ₹851.35 lakh.
Enterprise value = 294.95 + 851.35 = ₹1,146.30 lakh. The terminal value is 851.35 ÷ 1,146.30 = 74.3 per cent of the total.
Equity value = 1,146.30 − (220 − 30) = 1,146.30 − 190 = ₹956.30 lakh.
Reading the result: the sensitivity table
Because three quarters of the value sits in the terminal value, a small change in the rate or growth moves the answer a great deal. The table below recomputes the enterprise value (₹ lakh, whole numbers, using the same rounded factors) for assumed rates and growth.
| Discount rate \ growth | 3% | 4% | 5% |
|---|---|---|---|
| 11% | 1,185 | 1,321 | 1,502 |
| 12% | 1,044 | 1,146 | 1,277 |
| 13% | 933 | 1,011 | 1,110 |
The centre cell is the base case. A range of about ₹933 lakh to ₹1,502 lakh across this grid is wide, and a valuation report should show a range or explain why one point was chosen; the assumptions and sensitivity guide shows how a report presents it. The owner should decide what is negotiable: if a buyer is offering below ₹1,000 lakh, the grid shows which combinations of rate and growth would justify that.
Common mistakes
- Setting growth equal to or above the discount rate; the formula then fails or gives a nonsense figure.
- Letting the terminal year carry capital expenditure below depreciation indefinitely, which flatters the value.
- Mixing bases: discounting cash flow available to the firm at a cost of equity, or cash flow available to equity holders at WACC.
- Counting the same cash twice, for example adding surplus cash to enterprise value when the forecast also includes interest income.
- Using last year's profit growth as the forecast without a reason for it to continue.
- Presenting one point value without any sensitivity.
Limits
DCF is only as good as its forecast. For a young business the forecast is a story, and a cross-check with comparable company multiples is sensible. The step from enterprise value to a value per share, including adjustments for the stake, is in the equity bridge. The forecast itself should sit in a structured model; see how to build a financial model. Listed companies have further requirements, which are not covered here.
Need help with a DCF valuation?
If you need a cash flow forecast that a buyer, investor or valuer will accept, the work is mostly in the assumptions and in keeping them consistent. We can build the forecast and the valuation together in a financial modeling engagement.
Key takeaways
- FCFF = NOPAT + depreciation − capital expenditure − increase in working capital.
- Discount each year at the assumed WACC, then add a terminal value.
- Constant-growth terminal value needs growth below the discount rate.
- Show the share of value in the terminal value and a sensitivity grid.
- Equity value = enterprise value − net debt.
Read next
- Cost of capital and WACC
- From enterprise value to equity value per share
- Comparable company multiples method
- Assumptions and sensitivity analysis in a valuation report
Disclaimer: The figures, rates, multiples and names in the worked example are invented for illustration and are not market data. Where the article refers to law, it is based on the Companies Act, 2013 (MCA consolidated text) and the rules and live guides linked, as consulted on 6 October 2026; valuation for income-tax and FEMA purposes follows its own rules. This article is general information, not valuation, lending or legal advice; check the official text before acting.