Matching Cash Flows and Discount Rates in Discounted Cash Flow Appraisals
Excerpt
“There are many conceptual and practical problems inherent in valuing a closely held business using discounted cash flow (DCF). One of the most critical and basic decisions an appraiser has to make is to define the appropriate calculation of cash flow and match it with the appropriate discount rate. If this selection is not made properly, the entire appraisal is invalid, even if every other decision is made correctly. This article describes four choices the appraiser may use as the definition of cash flow, the appropriate discount rate that matches each definition, and the values that result from these choices.”