Houston Chambers
How does discounted cash flow valuation work?
How does discounted cash flow valuation work? How does it differ from the other valuation methods? Why do you think the text refers to discounted cash flow as the valuation method “best justified by financial theory”? Explain your answer.
Public Comments
- It works by looking at the present value of what could be your future value if you were to earn interest on the present value over a certain period of time. You would be discounting from the future to the present. For example, if you wanted to discount 10% of $1000 from 10 years in the future to today's value, in other words, how much is $1000 in 10 years earning worth of 10% compounded annually you would get the present value of $385.54 That means you would have to deposit $385.54 today to get back $1000 in 10 years earning 10% interest.
