Calculating present value example Suppose you own the exclusive right to sell hot dogs at the neighborhood Little League ball field. Your exclusive contract expires in five years, so you don't know what will happen exactly six years from now. However, you do have a very good idea of what your sales, profits, and free cash flows should look like for the next five years in which you are the exclusive hot-dog vendor.

You thus project that the stand will produce the following free cash flows in each year:

Year 1: $50 Year 2: $75 Year 3: $100 Year 4: $110 Year 5: $110

You want to know what the hot dog business is theoretically worth. You believe that the hot-dog stand is a relatively low-risk venture, and assume that the cash flows should be discounted at a rate of 10% per year.