The DCF

Two-Stage DCF & Terminal Value

A two-stage DCF adds explicit projected years and a terminal value.

highlighted = computed this step

Explicit years plus terminal value

A two-stage DCF adds the present value of a few explicit projected cash flows to the present value of a terminal value for everything after that.

V0=PVexplicit+PVterminalV_0=\text{PV}_{\text{explicit}}+\text{PV}_{\text{terminal}}
Two-stage DCF valueThe DCF table recomputes explicit PVs, terminal PV, and total value.YearCash flowDiscount factorPV1$100.0010/11$90.912$100.00100/121$82.643$100.001000/1331$75.13Terminal value$1,000.001000/1331$751.31Total = DCF value$1,000.00

DCF value under assumptions

The first 3 projected years have present value $248.69. The terminal value is a $100.00 per year perpetuity valued at $1,000.00 at the end of year 3; its present value today is $751.31. The DCF value under these assumptions is $1,000.00.

V0=33100000/1331 cents+100000000/1331 cents=$1,000.00V_0=33100000/1331\text{ cents}+100000000/1331\text{ cents}=\$1,000.00

Reconciliation check

This reconciles exactly to valuing the whole level perpetuity directly, which is also $1,000.00 under the same cash-flow and discount-rate assumptions.

two-stage total=Cr=$1,000.00\text{two-stage total}=\frac{C}{r}=\$1,000.00