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Discounting: Future Cash to Today’s Value

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How to translate cash a business will earn for years into a single number you can compare to price.

A business willArranging how your wealth passes on after death. (hopefully) generate free cash flowCash left after running and reinvesting in the business. every year for decades. Discounting is how you collapse all that futureA binding agreement to buy or sell at a set price on a future date. cash into one number — its value today — that you can compare against the price.

  1. Estimate the free cash flowCash left after running and reinvesting in the business. the business willArranging how your wealth passes on after death. produce each year into the futureA binding agreement to buy or sell at a set price on a future date..
  2. Discount each year’s cash back to today using (1 + r)^n — distant years shrink the most.
  3. Add up all those present values. That sum is the estimated intrinsic valueWhat an asset is really worth, based on its fundamentals..
A company is worth the present value of all the cash it willArranging how your wealth passes on after death. ever return to owners — no more, no less. Every valuationEstimating what an asset is worth. method is ultimately an approximation of this one idea. Once it clicks, you see why moats (durable futureA binding agreement to buy or sell at a set price on a future date. cash), growth (more futureA binding agreement to buy or sell at a set price on a future date. cash), and interest ratesThe price of money — what borrowing costs and saving earns. (the discount rate) all move value.

Because you can’t forecast forever, a DCF usually projects ~5–10 explicit years, then adds a “terminal value” capturing everything after. The next lesson walks through a simple one.

Key takeawayDiscounting sums every futureA binding agreement to buy or sell at a set price on a future date. year’s cash, each shrunk to today’s value, into one intrinsic-value number — the present value of all futureA binding agreement to buy or sell at a set price on a future date. cash.
FAQs
Why do distant years matter so little?

Because compounding the discount rate shrinks far-off cash dramatically — at 10%, cash 20 years out is worth only ~15% of its face value today. So near-term cash flows and the growth rate dominate a DCF, while very distant years contribute little.