Discounted Cash Flow Method
Discounted cash flow is the most theoretically complete method and the easiest to abuse, because a forecast is an opinion with decimal places. It earns its place when the company is growing, recovering, or investing heavily enough that no single historical year represents earning power. ExitSight forces working capital and capital expenditure onto the forecast so the cash flows are cash rather than dressed-up profit.
THE FORMULA
Value = Σ CFₜ ÷ (1 + r)ᵗ + Terminal value ÷ (1 + r)⁵
Terminal value uses the Gordon growth model; ExitSight also computes an exit-multiple variant as a check.
When to use it
- A growth plan, new capacity, or a signed contract will change results materially.
- The company is recovering from a loss year and history understates it.
- Capital expenditure and working capital swings are large relative to profit.
- A buyer will underwrite the purchase against projected cash flow.
When it misleads
- You have no defensible basis for the forecast — an invented projection produces an invented value.
- The forecast horizon is dominated by terminal value (over roughly 75%), which means you are really doing a capitalization.
- Results are so volatile that any five-year path is arbitrary.
What ExitSight asks you for
| Input | Where it comes from |
|---|---|
| Five-year revenue and margin forecast | Forecast worksheet; seeded from historical trend, then edited |
| Capital expenditure and depreciation | Forecast worksheet by year |
| Working capital change | Computed from your revenue forecast and historical ratios |
| Discount rate (WACC or equity) | Build-up worksheet; debt weighting optional |
| Terminal growth rate | Your estimate, sanity-checked against long-run GDP |
Worked example
The sample engagement, a five-year forecast discounted at 39%:
| Year 1 cash flow (EBITDA) | $135,910 |
| Year 5 cash flow (5% growth) | $165,199 |
| Present value of the 5-year forecast | $441,337 |
| Terminal value (4% growth) | $1,073,794 |
| Present value of terminal value | $431,534 |
| Indicated value | $872,871 |
In the report
Prints as Table 7 with the full forecast, the cash flow bridge, and a two-way sensitivity grid on growth and discount rate. See the sample report ›