From the course: Finance Foundations: Business Valuation

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Use discounted cash flow analysis to determine a company's value

Use discounted cash flow analysis to determine a company's value

From the course: Finance Foundations: Business Valuation

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Use discounted cash flow analysis to determine a company's value

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- Already we have forecast that our friends online retailing business will have free cash flow of $1,000 next year. Computed as $2,200 cash inflow from normal business operations minus $1,200 cash needed for capital expenditures. But a business doesn't last for just one year hopefully, what is our forecast of free cash flow after the first year. Well in a complete analysis, we would extend our sales forecast and financial statement forecast for several more years into the future. In this simple example for this course, let's assume that we have forecasts that our friends companies free cash flow will increase $50 in each year for the next two years. So the forecast of free cash flows for the next three years are as follows, next year $1,000, in two years $1,050, in three years $1,100. Now what about beyond our three-year detail forecasting horizon? Well, this gets interesting, so pay close attention. We call this…

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