The cover shows a hypothetical factory plan under discussion, not a valuation result or forecast for a real business.
If a factory has THB 3 million of earnings adjusted for analysis, should it be worth THB 20 million, THB 30 million, or more? One year's earnings cannot answer. The owner must replace machinery, add working capital, and bear the risk that customers may not keep buying in the future.
Discounted cash flow (DCF) turns those reasons into projected cash flows and assumptions that we can inspect. A detailed spreadsheet does not turn assumptions into facts. I therefore read a valuation alongside three questions: Where will the cash come from? How much more must be invested? How much would the value change if we are wrong?
This article continues the hypothetical parts factory from the previous article. All amounts are in THB and invented for learning, not data about a reader's company, market prices, or advice to trade securities. The earnings adjustments here depend on the conditions explained earlier; they are not permission to add back a real company's expenses every time.
First agree on what is being valued and on which date
The valuation date is the end of base year 0. We value operations first, then bridge to equity value. Cash flows in the first five forecast years all occur at the ends of years 1 through 5. This year-end convention makes the calculation clear; it does not claim every business receives cash at year-end or that five years is the right horizon for every company.
The cash measure is FCFF, free cash flow to the firm before financing cash flows. We therefore discount it at the weighted average cost of capital (WACC) and obtain enterprise value (EV) before deducting debt. Discounting FCFF directly at the cost of equity would mismatch the cash-flow scope and the people entitled to it.
If we instead valued free cash flow to equity (FCFE), the cost of equity would be the discount rate and the result would directly be equity value. This article does not use that method, so new borrowing and debt repayment do not obscure cash generated by operations.
Earnings must survive investment before they become valuing cash
Earnings before interest and tax (EBIT) must be converted to cash. In this case, FCFF = EBIT × (1 − tax rate) + depreciation and amortization − capital expenditure − increase in operating working capital. The example's 20% tax rate assumes operating cash tax equals that percentage of EBIT, without loss carryforwards or other tax differences. It is not a tax conclusion for a real company.
Depreciation is added back because it is not cash paid in that period. We do not assume machinery stays useful for free forever, so actual investment for maintenance and growth is deducted. Operating working capital excludes cash and interest-bearing debt and includes changes in operating liabilities.
| Item | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 |
|---|---|---|---|---|---|
| EBIT | 3.20 | 3.50 | 3.80 | 4.00 | 4.20 |
| Assumed operating taxes | 0.64 | 0.70 | 0.76 | 0.80 | 0.84 |
| NOPAT: EBIT after operating tax | 2.56 | 2.80 | 3.04 | 3.20 | 3.36 |
| Add depreciation and amortization | 1.00 | 1.05 | 1.10 | 1.15 | 1.20 |
| Less capital expenditure | 1.30 | 1.40 | 1.50 | 1.55 | 1.60 |
| Less increase in operating working capital | 0.40 | 0.45 | 0.45 | 0.50 | 0.50 |
| FCFF | 1.86 | 2.00 | 2.19 | 2.30 | 2.46 |
This forecast shows why rising EBIT does not mean cash rises by the same amount. In year 5, the factory has THB 4.20 million of EBIT but only THB 2.46 million of FCFF after tax, investment, and working capital. Treating all EBITDA as cash would ignore those needs. If the starting point is cash flow from operations that already includes working-capital changes, avoid subtracting working capital again.
The forecast also assumes the THB 0.50 million restructuring cost was fully paid in the base year, with no unpaid balance. The warranty provision from ordinary operations remains in the model: expected expense is in EBIT, and payments and changes in the provision are in working capital. We do not remove that liability from operations and then deduct it again from EV.
Profit must leave cash after investment
- Horizontal axis: years since the end of base year 0
- Vertical axis: annual FCFF, THB millions
Growth beyond year five must be funded
If the factory continues after year 5, we need a terminal value. The example assumes that at year-end 5 the business reaches a steady state with 3% long-term annual growth and a 12% return on incremental invested capital (ROIC). Both rates are assumptions, not market-certified growth or returns.
Growth takes investment. The reinvestment rate from net operating profit after tax is therefore g ÷ ROIC = 3% ÷ 12% = 25%. We cannot raise the growth rate in the terminal-value formula while leaving cash flows just as high when the business must invest more to grow.
| Calculation | Result | Meaning |
|---|---|---|
| Year 6 NOPAT = 3.36 × 1.03 | 3.4608 | After-tax operating profit in the first steady-state year |
| Reinvestment = 3.4608 × 25% | 0.8652 | Assumed net investment supporting growth |
| Year 6 FCFF = 3.4608 − 0.8652 | 2.5956 | Cash after the investment required in the steady state |
| WACC | 10% | Cost of capital assumed in this case |
| Year-end 5 terminal value = 2.5956 ÷ (10% − 3%) | 37.0800 | Still a value at year-end 5; discount it back to year 0 |
The steady-state formula requires WACC above g and a defensible point at which the business reaches that state. Return on incremental investment is not simply the historical accounting margin. If the factory must invest more to preserve sales, or competition reduces returns, holding ROIC at 12% may be too optimistic.
WACC is not 10% merely because it is a convenient round number. A real valuation must support the cost of equity, cost of debt, usable tax effects, capital weights, and the risk of the cash flows consistently. This example's cash flows are nominal THB amounts, so the discount rate must use the same basis. Do not mix inflation-adjusted cash flows with a nominal rate without adjustment.
Discount first, then separate lenders' and shareholders' claims
Discount each year's FCFF by (1 + 10%) raised to the year of receipt. The first five years have a present value of about THB 8.088 million. Discounting the THB 37.08 million terminal value at year-end 5 by 1.10 to the fifth power gives about THB 23.024 million. Together they give EV of about THB 31.111 million.
| Item | Amount | Basis |
|---|---|---|
| Present value of FCFF in years 1 to 5 | 8.088 | Discount each year's year-end cash |
| Present value of the period after year 5 | 23.024 | Discount terminal value back five years |
| EV | 31.111 | Calculated from unrounded amounts |
| Add excess cash | 2.000 | Total cash 2.50 less 0.50 needed for operations |
| Less interest-bearing debt | 6.000 | Assumed to be the market value of debt |
| Equity value | 27.111 | No other claims under the assumptions |
| Shares outstanding | 1,000,000 shares | No new shares or rights diluting current owners |
| Value per share | THB 27.11 | An illustrative result, not any stock's target price |
The example has no lease liabilities, noncontrolling interests, or preferred shares. A real company must be checked for these and other claims, using a scope consistent with the cash flows valued. The THB 0.50 million of necessary cash is not added to equity value again because the valued operations still need it.
Table figures are rounded for reading, so sums of displayed amounts may differ slightly. Calculations use unrounded values, including throughout the comparison table.
About 74% of EV depends on assumptions after year five
- Years 1 to 5: THB 8.0876 million in present value
- After year 5: THB 23.0238 million in present value
- Total EV: THB 31.1113 million before bridging to equity value
How much does value move when assumptions change?
About 74% of the base-case EV comes from the present value of cash after year 5. That does not make DCF useless, but it shows how much the result depends on long-term assumptions. The debate over growth, returns on investment, and required reinvestment matters more than the last decimal place.
| WACC / g | g 2% | g 3% | g 4% |
|---|---|---|---|
| 9% | 30.83 | 32.43 | 34.59 |
| 10% | 26.25 | 27.11 | 28.20 |
| 11% | 22.71 | 23.13 | 23.63 |
Every cell recalculates year 6 FCFF for its g. At g of 2%, 3%, and 4%, reinvestment is approximately 16.67%, 25%, and 33.33% of NOPAT, respectively. This is not just a change to the denominator. In this example, 12% ROIC exceeds WACC in every cell, so faster growth still creates value under those assumptions. If incremental investment returns less than the cost of capital, faster growth could destroy value instead.
The THB 22.71 million to THB 34.59 million range follows only the assumptions displayed. It is not a statistical confidence interval and does not cover every risk. The table holds first-five-year sales, margins, investment, and working capital fixed. A real analysis should consider scenarios connecting them, such as lower orders leaving capacity idle while factory upkeep still costs money.
What evidence would change my model?
For the factory, I would request plans for using and replacing machinery, documented orders, capacity that can actually be sold, returns and warranty history, and the cycles for collecting receivables and moving inventory. If profit rises because repairs are delayed or unsold stock is produced faster, the model's cash and risks must change too.
For a systems integration or software business, key evidence may include contracted work, delivery and cancellation terms, service renewals, team costs, and dependence on key people. A business paid in advance may have different working capital from a factory, but advance cash carries delivery obligations. It should not all be added as excess cash while ignoring the costs of completing the work.
A DCF useful for decisions should state both value under its assumptions and the evidence that would change them. THB 27.11 per share is therefore a starting point for testing the reasoning, not a conclusion that the company must sell at that price.
Further reading
For matching firm cash flow to the cost of capital and understanding growth in relation to investment, see Aswath Damodaran's FCFF notes, NYU Stern and his discussion of terminal value and excess returns. The factory, forecast tables, and all calculated outcomes here are hypothetical examples prepared for this series.
Concept sources were checked on October 18, 2026. The numbers are learning assumptions in this article, not market prices or a valuation of any company. Adapt them to real data and the engagement's scope before deciding.
