A discounted cash flow (DCF) model estimates a company’s intrinsic value by projecting future cash flows and discounting them for time and risk. It offers a structured alternative when market prices or comparable companies provide weak guidance, but its result is only as reliable as the assumptions behind the forecast. section 2.4.4 section 12.3.1
A practical DCF workflow includes:
- Project revenue, expenses, and resulting cash flow across several years. section 12.3.1
- Choose a discount rate that reflects business risk; early-stage start-ups may use rates from 20% to 50%. section 12.3.1
- Estimate terminal value from the final projected cash flow and a long-term growth assumption, then discount the projected values. section 12.3.1
- Challenge the output when revenue growth, expenses, accounting history, or the business model remains uncertain. section 2.4.4 section 12.3.1
Five-year Python model
A compact implementation sets a five-year horizon, starts revenue at $500,000, grows it by 30% annually, starts expenses at $700,000, reduces them by 10% annually, and applies a 40% discount rate. It calculates yearly cash flows, adds terminal growth of 5%, and discounts the resulting values.
