Discounted Cash Flow (DCF) Valuation Model by Excel for a Small Business

Description
How to value a company, construct an integrated three statement financial model, and  DCF valuation method. Building a skillset in financial modelling and equity valuations can transform your ability to understand a business and its value.
Note: A valuation is a technique in finance that looks to estimate the current worth of an asset or company.


A discounted cash flow valuation is used to determine if an investment is worthwhile in the long run. For example, in investment banking, a DCF valuation is used to determine if a potential merger or acquisition is worth it. Additionally, DCF valuation is used in real estate and private equity.
Outside of corporate finance, DCF valuations can help business owners make budget decisions and determine their own projected value.
A core principle of finance is that $10 today is worth more than $10 a year from now. This principle is the “time value of money” concept and it is a key basis for DCF valuation. Projected future cash flows must be discounted to present value so they can be accurately analyzed.



Discount Rate (r)
The discount rate brings future costs to present value. Typically, the discount rate is the company’s cost of capital, or how much the company must make to justify the cost of operation. This cost is usually the weighted average cost of capital (WACC), which is the company’s interest rate and loan payments or dividend payments to shareholders.