Discounting

One way to value a share is to add up the cash flows you expect to receive from it in the future and then ‘discount’ them.

Discounting is expressing cash received in the future in today’s money because inflation (for which the compensation as an investor is an interest rate on cash) erodes the value of money over time.

So, for example, £100 received now and invested at an annual interest rate of, say, 5% would be worth £105 in one year, £110.25 in two years (100 x 1.05 x 1.05) and £115.76 in three years.

Similarly, the discounted value (today’s equivalent) of £115.76 due in three years is £100. Or, given the choice between £100 now and £115.76 in three years, assuming annual interest rates of 5%, you should be indifferent as the two are worth about the same on a like-for-like basis.

• See Tim Bennett’s video tutorial: Five ways companies can cook cash flow.

MoneyWeek magazine

Latest issue:

Magazine cover
In the balance

How May 2015 could hit your pocket

The UK's best-selling financial magazine. Take a FREE trial today.
Claim 4 FREE Issues

Russell Napier: deflation is coming – hold on to your cash

Financial historian Russell Napier talks to Merryn Somerset Webb about the next deflationary bust – why it's coming, what it means for you, and how you can survive it.


Which investment platform?

When it comes to buying shares and funds, there are several investment platforms and brokers to choose from. They all offer various fee structures to suit individual investing habits.
Find out which one is best for you.


28 November 1660: the Royal Society is founded

After the restoration of the monarchy, members of the 'Invisible College' asked King Charles II to approve their scientific and literary society on this day in 1660.