Valuation in practice: multiples, a simple DCF, NPV, IRR and payback
Value a company two ways, judge a project three ways, and know where each method misleads.
Firm processes and online tests change from year to year and differ by office. Use this to prepare, and confirm the exact current steps on the firm's own careers page.
Key takeaways
- A valuation is a story about future cash, told in numbers. Multiples borrow the story from similar companies; a discounted cash flow (DCF) writes it out year by year.
- Common mistakes: Subtracting net debt from a P/E-based value (P/E already gives equity value).
- NYU Stern School of Business, Damodaran Online data: enterprise value multiples by sector (US), data as of January 2026: https://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/vebitda.html.
Key idea
A valuation is a story about future cash, told in numbers. Multiples borrow the story from similar companies; a discounted cash flow (DCF) writes it out year by year. Use both, and know where each one can fool you.
The case math module showed net present value and the perpetuity shortcut. Two more ideas are needed here. Enterprise value (EV) is the value of the whole business, to lenders and owners together. Equity value is what is left for the owners: enterprise value minus net debt (debt minus spare cash). A multiple divides a value by a measure of profit: EV divided by EBITDA, or the share price divided by earnings per share (the P/E ratio).
Multiples
| Industry | Companies with positive EBITDA | All companies |
|---|---|---|
| Telecom services | 6.54 | 7.54 |
| Air transport | 7.58 | 9.99 |
| Grocery and food retail | 8.94 | 9.07 |
| Apparel | 10.3 | 13.89 |
| All US companies except financial firms | 16.95 | 19.87 |
| Restaurants | 17.49 | 21.4 |
| Software | 24.48 | 31.75 |
Source: NYU Stern School of Business, Damodaran Online, enterprise value multiples by sector (US), data as of January 2026, checked 2026-10-01.
So-what
Multiples run from about 7 times EBITDA for telecom to about 25 to 30 times for software. The gap reflects growth, risk and how much of EBITDA must be spent on capex, which is why a multiple from one industry never transfers to another.
Worked case
Valuing a school group with peer multiples
The prompt
A family wants to sell its group of private schools in the UAE (fictional). EBITDA is USD 40 million and net debt is USD 60 million. Similar listed school groups trade at 9 to 11 times EBITDA (illustrative). What is the business worth, and what would the family receive?
The structure
- Equity value = EBITDA x peer multiple minus net debt (this comes from the question: what the owners receive)
- Enterprise value at the low and high multiple
- Subtract net debt to reach equity value
Working it through
1. EV, low
40 times 9.
Enterprise value, low (USD millions):40 × 9 = 3602. EV, high
40 times 11.
Enterprise value, high (USD millions):40 × 11 = 4403. Equity value, low
Subtract net debt of 60.
Equity value, low (USD millions):40 × 9 - 60 = 3004. Equity value, high
Subtract net debt of 60.
Equity value, high (USD millions):40 × 11 - 60 = 380
The recommendation
The business is worth about USD 360 to 440 million, and the family would receive about USD 300 to 380 million after repaying net debt of 60 million. The range is wide because 9 and 11 times differ by 80 million of value. The risk is that the peers are not truly similar: if they grow faster or need less capex for new campuses, the right multiple is lower. As a next step, check this range against a DCF and against prices paid in recent school deals.
A simple DCF with a terminal value
A DCF forecasts free cash flow for a few years, then adds a terminal value for all the years after that, and discounts everything to today. The terminal value uses the growing perpetuity from case math: the cash flow of the first year after the forecast, divided by (discount rate minus growth rate). The discount rate is usually the WACC, because unlevered free cash flow belongs to lenders and owners together.
Worked case
A three-year DCF for a cold-chain logistics firm
The prompt
A fictional cold-chain logistics firm in Thailand will produce unlevered free cash flow of USD 10 million next year, 11 million the year after and 12.1 million in year 3. After that, cash flow grows 2 percent a year forever. Its WACC is 10 percent. What is its enterprise value, and how much of it comes from the terminal value?
The structure
- EV = value today of years 1 to 3 + value today of the terminal value (this comes from the question: all future cash, in today's money)
- Discount each forecast year: divide by 1.1, 1.21 and 1.331
- Terminal value at the end of year 3: year 4 cash flow divided by (10 percent minus 2 percent)
- Discount the terminal value three years, then add
Working it through
1. Forecast years
Each year happens to be worth about 9.09 today, because cash flow grows 10 percent a year, the same as the discount rate.
Value today of years 1 to 3 (USD millions):10 ÷ 1.1 + 11 ÷ 1.21 + 12.1 ÷ 1.331 = 27.272. Terminal value
Year 4 cash flow is 12.1 times 1.02, divided by 0.10 minus 0.02.
Terminal value at the end of year 3 (USD millions):12.1 × 1.02 ÷ (0.1 - 0.02) = 1543. Terminal value today
Discount it three years.
Terminal value today (USD millions):12.1 × 1.02 ÷ (0.1 - 0.02) ÷ 1.331 = 1164. Enterprise value
Add the two parts.
Enterprise value (USD millions):10 ÷ 1.1 + 11 ÷ 1.21 + 12.1 ÷ 1.331 + 12.1 × 1.02 ÷ (0.1 - 0.02) ÷ 1.331 = 1435. Share from the terminal value
Terminal value today divided by enterprise value.
Terminal value share of EV (percent):115.91 ÷ 143.18 × 100 = 80.956. Sensitivity
The same model with 3 percent growth after year 3 instead of 2.
Enterprise value at 3 percent growth (USD millions):10 ÷ 1.1 + 11 ÷ 1.21 + 12.1 ÷ 1.331 + 12.1 × 1.03 ÷ (0.1 - 0.03) ÷ 1.331 = 161
The recommendation
The firm is worth about USD 143 million, but about 81 percent of that comes from the terminal value, the years after the forecast. This means the answer rests mostly on two guesses: long-run growth and the discount rate. One extra point of growth lifts the value to about USD 161 million, 12 percent more. The risk is false precision: a DCF can be tuned to any answer. As a next step, show a range for growth and WACC, and check that the implied EV divided by EBITDA is close to what peers trade at.
Projects: NPV, IRR and payback together
The internal rate of return (IRR) is the discount rate at which a project's NPV is exactly zero: the yearly return the project earns. Payback is how long until the cash spent comes back. Each answers a different question, and they can disagree.
Worked case
Two projects, two different winners
The prompt
A fictional manufacturer in Poland can do only one of two projects (EUR millions). Project A costs 100 today and returns 60 in year 1 and 72 in year 2. Project B costs 1,000 today and returns 1,150 in year 1. Its cost of capital is 10 percent. Which should it choose?
The structure
- Choose the project that adds the most value today (this comes from the question: only one can be done)
- NPV of each at 10 percent
- IRR of each
- Payback of A, as a check on risk
Working it through
1. NPV of A
60 divided by 1.1, plus 72 divided by 1.21, minus 100.
NPV of A (EUR millions):60 ÷ 1.1 + 72 ÷ 1.21 - 100 = 14.052. IRR of A
At 20 percent, 60 divided by 1.2 is 50 and 72 divided by 1.44 is 50, so the NPV is zero. The IRR is 20 percent.
NPV of A at 20 percent (EUR millions):60 ÷ 1.2 + 72 ÷ 1.44 - 100 = 03. Payback of A
60 comes back in year 1; the other 40 takes 40 out of 72 of year 2.
Payback of A (years):1 + (100 - 60) ÷ 72 = 1.564. NPV of B
1,150 divided by 1.1, minus 1,000.
NPV of B (EUR millions):1,150 ÷ 1.1 - 1,000 = 45.455. IRR of B
A one-year project: the gain divided by the cost.
IRR of B (percent):(1,150 - 1,000) ÷ 1,000 × 100 = 15
The recommendation
The company should choose project B, because it adds about EUR 45 million of value today against about EUR 14 million for A. IRR points the other way (20 percent for A against 15 percent for B) because IRR ignores size: a high return on a small sum can add less value than a lower return on a large one. The risk with B is that it puts EUR 1,000 million at stake for one year. As a next step, confirm the company can fund B and that the 1,150 is as certain as A's cash flows.
| Tool | Good for | Misleads when |
|---|---|---|
| EV divided by EBITDA | A quick, market-based value | Peers differ in growth, capex or accounting; profits are at a cyclical peak; leases inflate EBITDA |
| P/E ratio | Comparing share prices with profit | Debt levels differ; profit includes one-off gains; profit is near zero |
| DCF | Making every assumption visible | The terminal value is most of the answer; small changes in the discount or growth rate swing the value |
| NPV | Value added today; the best single test | Cash flow forecasts are optimistic, or the discount rate ignores the project's own risk |
| IRR | A return to compare with the cost of capital | Projects differ in size or timing; cash flows change sign more than once |
| Payback | How long money is at risk | It ignores cash after payback and the time value of money |
So-what
Lead with NPV or a DCF range, cross-check with a multiple, and use IRR and payback as supporting facts.
A company has an enterprise value of GBP 900 million, debt of GBP 250 million and cash of GBP 50 million. What is its equity value, in GBP millions?
Next year's free cash flow after the forecast period is INR 20 crore. The discount rate is 9 percent and long-run growth is 3 percent. What is the terminal value, in INR crore? (Round to two decimals.)
Subtracting net debt from a P/E-based value (P/E already gives equity value). Using a growth rate in the terminal value higher than the economy can sustain forever. Mixing an unlevered cash flow with the cost of equity, or a levered one with the WACC. Choosing the project with the higher IRR when the other adds more value.
Why do software companies often trade at higher EV to EBITDA multiples than telecom operators?
In a DCF, 80 percent of the value comes from the terminal value. What should you do?
Facts checked against sources on 2026-10-01. Sources, company filings and standard setters first.
- NYU Stern School of Business, Damodaran Online data: enterprise value multiples by sector (US), data as of January 2026: https://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/vebitda.html
Sources for this lesson (2)
- Recognized public explanations of case-interview concepts and terms
- NYU Stern School of Business, Damodaran Online data: enterprise value multiples by sector (US), data as of January 2026
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