Discounted Cash Flow Valuation Across an Asset’s Lifetime

Summary

The document addresses the time horizon used when valuing an asset from expected returns. Its answer describes discounting expected cash flows over the asset’s lifetime. For a company assumed to continue operating indefinitely, valuation commonly includes cash flows extending without a fixed terminal year; discounting reduces the present contribution of distant cash flows.

A practical valuation can forecast and discount cash flows explicitly for an initial period, then represent later cash flows through a residual value. That residual value must itself reflect expected future cash flows discounted appropriately. The discussion explains the structure of a discounted cash flow horizon rather than proposing a money-weighted average holding time. It offers no numerical example, market evidence, or detailed guidance on choosing forecasts, discount rates, or terminal value assumptions, so those inputs remain outside its scope.

Key ideas

• Discount expected cash flows over the asset’s lifetime to value it.
• For a continuing company, forecasts may extend indefinitely, with distant cash flows contributing less after discounting.
• Valuation can combine an explicit forecast period with a residual value for later cash flows.
• The residual value also depends on properly discounted expected future cash flows.

Tags

# Expected return over what time horizon?


# Expected return over what time horizon?












In finance, it is common to price things at their discounted expected value.

What time horizon is the market generally thought to consider? Is it a "money-weighted" average of expected holding time?

## Answer by Bob Jansen (score 2)

https://quant.stackexchange.com/a/68697

One would normally use the discounted expected cash flows over the lifetime of the asset. Companies don't die so it's customary to take cash flows into infinity. Due to discounting, cash flows very far in the future don't contribute much to the sum.

This method might be split into two parts where explicit cash flows are forecast and discounted for the first $n$ years + a residual value. However, this residual value would again be based on expected future cash flows properly discounted.

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.