From the course: Financial Accounting Part 2

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Simple discounted cash flow valuation example

Simple discounted cash flow valuation example

From the course: Financial Accounting Part 2

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Simple discounted cash flow valuation example

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- Previously we have forecasted that our friend's online retailing business will have cash flow of $1,000 next year. But a business doesn't last for just one year, hopefully. What's our forecast of cash flow after the first year? In this simple example, let's assume that we have forecasted that our friend's company's cash flow will increase $50 in each of the two following years. So the forecasted cash flows for the next three years are as follows, next year, thousand dollars, in two years, $1,050, and in three years, $1,100. What about beyond our three year detailed forecasting horizon? Well, this gets interesting so pay close attention. We call this the forecast in the terminal year. Here's the insight. Eventually even the best business person is going to run out of innovative ideas. At that time, any additional investment funds that you give them will be used in just an average way, and earn an average return. And…

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