Discounted Cash Flow
Projects the cash a business will actually generate over five years and discounts it back to what it is worth today.
How it works
- 1
Estimate free cash flow for the next five years, starting from current revenue and operating margin, then growing it at a decaying growth rate.
- 2
Pick a discount rate that reflects how risky those cash flows are. Indian mid-market businesses typically sit between 13% and 22% depending on sector and scale.
- 3
Discount each year's cash flow back to today using 1 / (1 + r)^n.
- 4
Add a terminal value for everything beyond year five, using a 5% long-term growth assumption.
- 5
Sum the discounted cash flows and the discounted terminal value. That sum is the enterprise value.
Sample: a Pune-based precision components manufacturer
| Annual revenue | ₹20,00,00,000 |
| Free cash flow margin | 12% (₹2,40,00,000) |
| Growth rate (year 1) | 15%, decaying to 8% by year 5 |
| Discount rate | 16% |
| Terminal growth | 5% |
| Step | Formula | Result |
|---|---|---|
| Year 1 cash flow | 2,40,00,000 × 1.15 | ₹2,76,00,000 → discounted ₹2,37,93,103 |
| Year 2 cash flow | 2,76,00,000 × 1.13 | ₹3,11,88,000 → discounted ₹2,31,80,588 |
| Year 3 cash flow | 3,11,88,000 × 1.11 | ₹3,46,18,680 → discounted ₹2,21,84,606 |
| Year 4 cash flow | 3,46,18,680 × 1.10 | ₹3,80,80,548 → discounted ₹2,10,32,120 |
| Year 5 cash flow | 3,80,80,548 × 1.08 | ₹4,11,26,992 → discounted ₹1,95,79,447 |
| Terminal value | (4,11,26,992 × 1.05) ÷ (0.16 − 0.05) | ₹39,25,85,013 → discounted ₹18,69,29,283 |
| Sum of present values | 2,37,93,103 + 2,31,80,588 + 2,21,84,606 + 2,10,32,120 + 1,95,79,447 + 18,69,29,283 | ₹29,66,99,147 |
Roughly 1.48× revenue — reasonable for a profitable, steadily growing manufacturer. Note that the terminal value is about 63% of the total, which is typical and also why the discount rate matters so much.
- Businesses with predictable, repeatable cash flows — manufacturing, healthcare, established SaaS.
- Capital-intensive companies where profitability, not just topline, drives value.
- Deals where the buyer intends to hold and operate the business long term.
- Pre-revenue or early-stage companies — there is no cash flow history to project from.
- Businesses with volatile or seasonal earnings, where a single base year skews the whole model.
- Highly sensitive to the discount rate: a 2% change can move the answer by 20% or more.
Valuenomic runs this method alongside five others and weights the results.