Valuation

The Valuation section configures a Discounted Cash Flow (DCF) analysis, one of the most widely used methods for estimating the intrinsic value of a business. The generated model will include a valuation worksheet that discounts projected free cash flows to their present value and computes an enterprise value estimate.

The DCF Methodology

DCF valuation rests on a fundamental principle of finance: a dollar today is worth more than a dollar in the future, because today's dollar can be invested to earn a return. To value a business, we:

Project free cash flows for each period in the model's forecast horizon.
Estimate a terminal value representing all cash flows beyond the projection period, assuming they grow at a constant rate in perpetuity.
Discount both the projected cash flows and the terminal value back to present value using a discount rate that reflects the risk of those cash flows.
Sum the present values to arrive at the enterprise value.

The formula for terminal value uses the Gordon Growth Model:

Terminal Value = Final Year FCF x (1 + g) / (r - g)

Where g is the perpetuity growth rate and r is the discount rate.

Settings

Valuation Date

The date to which all future cash flows are discounted. This is typically the current date or the beginning of the projection period. It anchors the time value calculation: the further a cash flow is from this date, the more it is discounted.

Discount Rate (WACC)

The Weighted Average Cost of Capital represents the blended required return demanded by all capital providers (equity holders and debt holders). It reflects the riskiness of the company's cash flows.

Typical ranges:

Large, stable companies: 7-10%
Mid-market companies: 10-13%
Early-stage or high-risk companies: 13-20%

A higher discount rate reduces the present value of future cash flows, resulting in a lower enterprise value. This parameter has a significant impact on the valuation output.

Perpetuity Growth Rate

The assumed long-term growth rate of free cash flows after the explicit projection period ends. This rate should reflect sustainable, long-run growth expectations.

Guidelines:

Must be lower than the discount rate. If the growth rate equals or exceeds the discount rate, the terminal value formula produces meaningless results (infinite or negative values).
Typical range: 2-4%. This roughly aligns with long-term nominal GDP growth in developed economies.
Conservative is safer. Overestimating long-term growth is one of the most common errors in DCF analysis.

Exploring Sensitivity

The workbook keeps the two most subjective inputs — the discount rate and the perpetuity growth rate — as plain, labelled driver cells with workbook-level named ranges. Because the whole valuation is live formulas, changing either cell in Excel recalculates the entire block instantly, so you can explore sensitivity directly in the generated workbook.

Prerequisites

For valuation to work correctly, you must:

Define a Free Cash Flow master account prefix in the Master Accounts section.
Set the FCF Account Code to the specific account that contains the final Free Cash Flow figure.
Have projection periods defined so the model has future cash flows to discount.

If these prerequisites are not met, the validation step will flag an error before the model is built.

Interpreting the Output

The valuation block (appended beneath the free-cash-flow section of the Analysis worksheet) includes, one labelled row each:

Period end dates and pro-rata inclusion factors — a period straddling the valuation date contributes only its post-date share.
Discount factors applied to each period's cash flow.
Free cash flows referenced directly from the FCF account's roster row (nothing is recomputed).
Explicit-period NPV, the terminal value (Gordon perpetuity, guarded against growth ≥ discount rate), and the resulting net present value, with the explicit/terminal split shown as percentages.
A reference EBITDA and NPV/EBITDA multiple when an EBITDA account is designated.

Remember that DCF is an estimate, not a precise measurement. The sensitivity table helps communicate the range of plausible values, which is often more useful than a single number.