How to Calculate Residual Cash Flow

Calculating how much an investment into business property is worth is not always straightforward. Property depreciates in value over time, so you must calculate the residual value -- the amount the property will be worth if the business liquidates it after the last year of depreciation. You must perform several calculations to determine residual value of a property.

Calculate the free cash flow for the analysis period. Write down the net operating profit for the analysis period. Subtract taxes from this figure, then subtract the net investment, the amount of money you put into your investments. Subtract the change in working capital from the beginning of the analysis period to the end of the period from this figure to get the free cash flow.

Calculate the discount rate. Multiply each investment in your portfolio by its expected yearly return and add the figures together. Divide the total by the total investments you made to get the discount rate. For example, if you have two investments of $10,000 each with an expected return rate of 5 percent and one investment of $5,000 with an expected return rate of 3 percent, do the calculation (500+500+150)/25,000. Your discount rate will therefore be 0.046 or 4.6 percent.

Calculate the residual value by dividing the free cash flow by the discount rate.

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About the Author

Jack Ori has been a writer since 2009. He has worked with clients in the legal, financial and nonprofit industries, as well as contributed self-help articles to various publications.