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Perhaps the most common, and conceptually best, technique for business valuation is calculation of the present value of expected future returns from the business. Although present-value computations are easy, determining the relevant inputs is not. Choices need to be made for:
- the type of future return to be measured (income or cash flow);
- estimates of the future amounts;
- an appropriate discount rate;
- the time period for the analysis; and
- the estimation of a terminal value.
We consider each of these areas.
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