Present-Value Analysis and the Difficulty of Forecasting Future Cash Flow

When future cash flows' are reasonably predictable and an appropriate discount rate can be chosen, NPV analysis is one of the most accurate and precise methods of valuation.

Unfortunately future cash flows are usually uncertain, often highly so.

Moreover, the choice of a discount rate can be somewhat arbitrary. 

These factors together typically make present value analysis an imprecise and difficult task.



The Perfect Business to Value - Annuity

A perfect business in terms of the simplicity of valuation would be an annuity; an annuity generates an annual stream of cash that either remains constant or grows at a steady rate every year. 



Real businesses, even the best ones, are unfortunately not annuities. 

Few businesses occupy impenetrable market niches and generate consistently high returns, and most are subject to intense competition. 

Small changes in either revenues or expenses cause far greater percentage changes in profits. 

The number of things that can go wrong greatly exceeds the number that can go right.

Responding to business uncertainty is the job of corporate management.

However, controlling or preventing uncertainty is generally beyond management's ability and should not be expected by investors.'