Greig Taylor
Partner & Managing Director, New York
This Practice Note provides information for attorneys on how experts use the discounted cash flow methodology, a subset of the income-based approach, to quantify damages. AlixPartners' Greig Taylor and Alexander Lee provide an overview of how experts use the discounted cash flow (DCF) methodology, and how courts and arbitrators react to it.
The DCF methodology is a subset of the income-based approach, which experts may apply under a going concern basis of valuation.
The expert usually applies the DCF methodology when:
- The dispute at issue concerns the future earning potential of a particular asset.
- The expert can reasonably and accurately forecast future cash flows.
- Once an expert decides to apply the DCF methodology, he must:
- Develop a cash flow forecast.
- Determinetheappropriatediscountratethatadequatelyaccounts for the risks of earning those cash flows.
- Apply the discount rate and aggregate the discounted cash flows to calculate the present value of the investment or business.
DCF models are useful when a business is growing and cash flows are expected to change for several years before achieving a stable operating level.
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