Valuing a Business: Discounted Cash Flow and the Internal Rate of Return
Valuing a business can often be a subjective process, and there are no hard and fast rules. When asked how to value a business, many people would probably first think of a multiple of its net profits, or perhaps it's asset (book) value, both of which look at the historical performance of the company. However, sometimes it is more appropriate to consider the future potential of the company, and this article examines ways in which businesses can be valued on the basis of expected future income and profits.
This is known as an investment approach to valuation and it use tools commonly known as discounted cash flow (DCF), net present value (NPV) and internal rate of return (IRR).
Discounted cash flow and net present value
Put simply, discounted cash flow calculates a company's current value by estimating the amount of money it will make in the future. To take into account that money received today is worth more than money received in the future, this income is then discounted at a rate that takes into account its 'time value'. The selection of this discount rate is problematic as it is an expression of the risk and uncertainty of actually receiving the projected income together with many other factors, such as the rate of inflation and the opportunity cost of investing the money elsewhere. The value that an investor arrives at for this income stream is known as the net present value (NPV), and can be defined as showing the value of a stream of future cash flows discounted back to the present by some percentage that represents the minimum desired rate of return.
The full article is available to our members.
For sale is a long-established tree surgery and arboricultural services business with an excellent reputation, serving both domestic and commercial sectors across Southern England, including the Home Counties and London.
An opportunity has arisen to acquire a mechanical engineering company specialising in the Water Industry. Benefitting from over 3 decades of trading, this business has built a solid and long standing client base comprised of prominent UK utility comp...
An opportunity has arisen to acquire a reputable IT support and development services provider with a UK-wide client base and a proven record for innovation and resilience in the constantly evolving IT sector. Throughout its 25+ year trading history,...
Business Sale Report is your complete solution to finding great acquisition opportunities.
Join today to receive:
All this and much more, including the latest M&A news and exclusive resources
Please choose your settings for this site below. For more information please read our Cookie Policy
These cookies are necessary for our website to function properly and provide you with access to all features.
These are analytics cookies that help us to improve the way our website works.
These are used to improve the functional performance of the website and make it easier for you to use.