Friday, August 3, 2007
Cash Flow Analysis: A Private Lesson from Staley Cates
Cates: When we do a longhand net present value calculation to discount back the free cash flows, we usually use eight years worth of cash flows at a particular assumed growth rate. Then [at the end of] year 8, we put the terminal multiple (almost always one that assumes no growth from that point forward) on the cash flows at that point. That is what values the remaining cash flows from the business beyond year 8. The main thing there is being very conservative since no one can really have a clue what will happen then.