What Is DCF Model?

The DCF model is the gold standard of intrinsic valuation. Rather than relying on market multiples (which reflect what others are willing to pay), a DCF estimates what the business is fundamentally worth based on the cash it will generate.

A DCF model typically follows this structure: project free cash flows for an explicit forecast period (usually 5-10 years), calculate a terminal value to capture cash flows beyond the explicit period, discount both the explicit period cash flows and terminal value to present using WACC, sum the present values to arrive at enterprise value, subtract net debt to arrive at equity value.

Terminal value calculation uses either the Gordon Growth Model (FCF x (1+g) / (WACC-g), where g is the long-term growth rate) or the exit multiple method (applying an EV/EBITDA multiple to the final year's EBITDA). Terminal value often represents 60-80% of total DCF value, making the terminal assumptions highly influential.

FP&A teams use DCF models for company valuation (supporting M&A, IPO pricing, or internal assessments), project evaluation (NPV analysis of capital investments), and strategic planning (modelling the value impact of strategic initiatives).

DCF sensitivity analysis is essential — varying WACC and terminal growth rate by small amounts can significantly change the implied value. A sensitivity table showing value across a range of WACC (8-12%) and terminal growth rates (1-3%) helps frame the range of reasonable valuations.

For UK businesses, DCF models should use UK-specific inputs: UK gilt yields for the risk-free rate, UK-relevant beta estimates, UK tax rates for cash flow projections, and GBP-denominated cash flows.

Get started with the DCF model template, or learn how to build your first three-statement model which forms the foundation of any DCF. For sensitivity testing on the discount rate, see our entry on sensitivity analysis.