To move from theory to practice, we'll now apply the DCF model to a real-world scenario: valuing a small business. In this case, it's Andrea's Bakery, a gluten-free bakery that has been operating since 2000 and now faces a pivotal decision.

Andrea is considering relocating to another city, and to do so, she needs to understand the market value of her current business. That means performing a business valuation based on available financial data and expectations about future performance.

This is where DCF becomes more than just a model. It becomes a tool for decision-making.

Andrea has provided:

• Income statements and balance sheets for the years 2022–2024;

• Historical context about the business and its operations;

• A goal: determine how much her bakery is worth if she decides to sell.

Using this information, we'll walk through each step of the DCF process, calculating future cash flows, selecting a discount rate, and estimating terminal value. But what makes this example valuable isn't just the math—it's the chance to apply abstract concepts to a tangible situation.

In valuing a small, real-world business, we must also deal with challenges like limited data, forecasting uncertainty, and subjective assumptions. That makes this case especially relevant for entrepreneurs, consultants, and analysts working with private companies.