Linear perception, exponential change, and the new value

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The largesse of future value

  1. As business profits and cash flows are projected to grow with time, this is a valuation risk that is compensated for through the discounting mechanism. The early periods are discounted least, correctly, since the early periods contain the highest certainty. But as these are also the less profitable ones, their impact in the multi-year continuum is limited. The later years are stronger but are also discounted the most. And thus, business cash flows, no matter when, typically combine to form a small proportion of the present value total.
  2. Terminal value, which is also deeply discounted from a late year in the outlook, compensates for that discount (and then some) as it formed by a multiple — often not insubstantial — of the late-year profit that’s predicted, which, as noted, is a profit that is based on growth — often also not insubstantial. In other words, this future value constitutes a potentially two-fold exaggeration: the application of a multiple to significant forecasted profits.

The question of perpetuity

It resolves in optionality



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