A Pragmatic Look at Valuation (Collection)

4. Free Cash Flows

4.1 Introduction

As stated in Chapter 1, “Introduction,” the main goal of this book is to figure out a detailed methodology for measuring the value of any business decision, project, or asset. What this essentially means is that we need to be able to evaluate the following present value relation for any business decision, project, or asset:

where E(CF₁), E(CF₂), and so on are expected future cash flows, r denotes a discount rate, and Value₀ is the value today (time 0) of the project that we are trying to measure. Because all the cash flows and discount rates are expectations of future events, in the previous chapter we started ...