What are the two main components of a DCF analysis?

The main components of a Discounted Cash Flow (DCF) analysis are the forecasted cash flows and the terminal value. The forecasted cash flows represent the expected cash inflows generated by the business over a specific projection period, which typically ranges from five to ten years. This aspect is essential because it reflects the core operational performance of the business and provides insight into how much profit can be converted into actual cash.

The terminal value accounts for the bulk of a company's value in many cases, as it estimates the value of the business at the end of the projection period into perpetuity assuming a stable growth rate. It captures the idea that the business will continue generating cash flows beyond the initial forecast period. Therefore, combining these two components—future cash flows during the projection period and the terminal value—is fundamental to performing a comprehensive DCF analysis.

While examining the discount rate is crucial for determining the present value of these cash flows, the essential elements that directly contribute to the calculation of the DCF itself are indeed the forecasted cash flows and terminal value.