A model organizes assumptions; it does not reveal a certain price
A discounted cash flow (DCF) model estimates a present value from projected cash flows and a discount rate. A terminal value represents cash flows beyond the explicit forecast period under a further assumption. Small changes to growth, discount rate, cash-flow timing or terminal method can materially change the result.
A DCF needs a cash-flow stream that can be defined and estimated. For a token, commodity or collectible with no rights to cash flows, this model alone does not produce a meaningful DCF valuation. Comparables, use value or collateral analysis rely on different bases and assumptions; a quoted price is not an automatic substitute for cash flows.
This independently calculated, fully fictional time-value illustration uses the standard idea that a future cash flow is converted to present dollars by dividing by a period-matched discount factor. The IRS internal valuation manual is cited only for its procedural point that a chosen benefit stream and discount rate should be consistent and assumptions documented. It does not value a real company, select a discount rate, make a stock pick or give an investment recommendation.
Fictional DCF with an explicit terminal value
Assumptions (all invented): fictional free cash flow to the firm (FCFF)—cash available to all capital providers after operating taxes, capital expenditures and working-capital investment, but before interest and other financing flows—is $10,000, $11,000 and $12,000 at the ends of years 1–3; year-4 FCFF is $12,240 (2% growth from year 3); weighted-average cost of capital (WACC)=8% per year is the matching discount rate for this firm-level cash flow; long-run growth g=2%. The stipulated FCFF inputs already include operating taxes; this exercise does not calculate them separately. FCFF is not the statement line “cash from operating activities” (CFO): CFO is a separate measure and is not necessarily FCFF. No debt/cash bridge, dilution, fees or interim distributions are modeled. All amounts are invented dollars for one hypothetical business.
For a constant-growth teaching assumption, terminal value at the end of year 3 = year-4 FCFF ÷ (WACC−g) = $12,240 ÷ (0.08−0.02) = $204,000. The formula requires WACC > g; these inputs satisfy 8% > 2%. This assumption is not a claim that the business will grow forever.
Simplified firm value = $10,000/1.08 + $11,000/1.08² + ($12,000+$204,000)/1.08³ = about $190,158. Rounded components: $9,259 + $9,430 + $171,468. This is an invented operating-value model output, not a market quote or “fair value” fact. To estimate equity from a real FCFF model, an analyst would separately bridge firm value for debt and other non-common claims, add relevant non-operating assets, and address share count; those inputs are absent here.
Sensitivity: change an assumption, not the conclusion
| WACC | Terminal growth g | Terminal value at year 3 | Present value |
|---|---|---|---|
| 8% | 2% | $204,000 | about $190,158 |
| 9% | 2% | $174,857 | about $162,721 |
| 8% | 1% | $173,143 | about $165,662 |
The same near-term cash flows produce different estimates when WACC or growth assumption changes. A complete company valuation would also need to define whether cash flows belong to the firm or equity, address debt/cash and share count where applicable, inspect source statements, and test other scenarios. Forecast uncertainty and model choice remain substantial.
Audit the model before reading its output
- Label each cash flow, date and currency; keep period frequency consistent with r.
- State where cash flows came from and whether they are actual or projected.
- Write the terminal-value method and make its growth/discount assumptions visible.
- Check the condition r>g for a constant-growth terminal formula.
- Show sensitivity and limitations; never present one model output as a guaranteed price.
Source: IRS Internal Revenue Manual 4.48.4, Business Valuation Guidelines, effective 22 September 2020 and reviewed 26 October 2026. This internal guide for IRS valuation staff calls for consistent benefit-stream/discount-rate selection and documented assumptions and relevant risk factors. It is not an investor valuation standard or investment advice. All calculations here are original fictional arithmetic. A separate SEC-filed 2023 valuation report is cited only as one company-specific example of projected cash flows discounted using WACC; it is not a general standard or transferable valuation conclusion.