The most common valuation formula – the discounted cash flow model – adds up the forecasted cash flows of a company to determine value. The future cash flows are discounted using a required rate of return to determine the value of a company based on its ability to generate a cash position.

Let’s assume that Apple can grow its cash flows by an average 6% per year based on prior growth and the required rate of return is 4%.

The formula for calculating discounted cash flows is:

**Intrinsic value = CF1 / (1 + r) + CF2 / (1 + r)^2 + CF3 / (1 + r)^3 + …**

CF refers to cash flow in year one (CF1), year two (CF2), and so on.

Assume Apple’s most recent year’s cash flow was $80bn (rounded). This needs to be projected out into the future at the growth rate. A spreadsheet is recommended so that the cash flows can be added for up to 30 years or more.

The example below shows five years:

Year 1: $84.8bn

Year 2: $89.88bn

Year 3: $95.28bn

Year 4: $100.99bn

Year 5: $107.1bn

These are then discounted back. For Year 1, divide by 1.04. For Year 2, divide by 1.04 twice (1.04^2), for Year 3 divide by 1.04 three times (1.04^3), and so on.

Year 1 discounted: $81.53bn

Year 2 discounted: $83.10bn

Year 3 discounted: $84.70bn

Year 4 discounted: $86.33bn

Year 5 discounted: $89.99bn

Add all these discounted values up to get $425.65bn, but that is only for the next five years.

If we expect the company to be around for at least 40 years, we need to do this process for 40 years. In this case, this results in a value of $4,843.78tn.

With 16.5 billion shares outstanding, the implied value of the stock is $293.56. It is a major assumption to think a company can grow cash flows at 6% for 40 years. If using a spreadsheet, at any given year you can increase or decrease the assumed growth rate to change the intrinsic value.