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Cash Flow Valuation Process
Cash flow valuation is the process of finding the value of money over different time periods. The process is based on the concept of time value of money, which is one of the most universally useful concepts in finance because the formulas can be used to find the value of any asset where you are expected to receive money in the future, including: bonds, stocks, lottery winnings, structured legal setlements, businesses, and web sites. In order to learn how to value cash flow, you will have to learn other financial concepts. For those who are having calculus flashbacks, don’t worry, I’ll try to make this as easy as possible
- Project Future Cash Flows – this is usually done from a 3-statement projection model or by using simple assumptions about Revenue, Tax, Depreciation, Amortization etc and calculating free cash flow from there
- Calculate the Discount Rate – this is either taken to be a simple percentage or is calculated using WACC
- Discount Future Cash Flows – either by using the Mid-Year discount or a simple discount period, it is fairly simple to calculate the present value of future cash flows
- Estimate Terminal Value – Terminal Value is then estimated either by using a terminal exit multiple (usually an EBITDA multiple) or with a Terminal Growth Rate (Gordon GrowthMethod)
- Find the Net Present Value – to find the net present value simply discount the terminal value (again using WACC or a simple %) and then add that to the sum of the discounted cash flow values
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