What is a key step following the projection of cash flows in a discounted cash flow analysis?

Following the projection of cash flows in a discounted cash flow (DCF) analysis, determining the Terminal Value is a crucial step. The Terminal Value represents the estimated value of a business beyond the explicit forecast period, capturing the bulk of the total value in many cases. This value accounts for all future cash flows that are expected to be generated after the forecast period, extending into perpetuity or until exit.

Calculating the Terminal Value can be done using either the perpetuity growth model or the exit multiple method. Incorporating the Terminal Value into the DCF allows for a more complete assessment of the company's worth, reflecting its ongoing earning power and future potential.

While estimating future revenue is integral to projecting cash flows and analyzing market trends provides valuable context, neither occurs after cash flows have been projected within the framework of DCF analysis. Net income is an accounting measure that comes about after cash flows have been accounted and does not directly relate to the DCF process.