Discounted Cash Flow
Income-based Business Valuation Method
What It Means
Discounted Cash Flow method determines the business value by considering these inputs:
The objective of the method is to determine what the expected economic benefits stream is worth in present day dollars, given the risks associated with owning and operating the small business. Because of the method's solid financial theory foundation, it is favored by seasoned investors and business valuation professionals.
Business appraisers and economists sometimes use the formal name Discounted Future Economic Income when referring to the Discounted Cash Flow business valuation method.
The reason is that this method is quite flexible with the choice of the income measures that can be used as its input. Key to the method's accuracy, though, is a careful match between the income measure, known as the earnings basis, and the discount rate.
Valuing a Business based on Cash Flow and Risk
Business Valuation Tools