Simple discounted cash flow valuation example

- Previously, we have forecast … 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 forecast … 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, $1,000, 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 play 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 the present value of the cash flows from the investment …