Most analysts agree that the real value of any venture is its potential earning power. The discounted earnings method, more than any other, determines the firm’s true value. One example of a pricing formula that uses earning power as well as adjusted tangible book value is illustrated in Figure 14.2. The idea behind discounting the firm’s cash flows is that dollars earned in the future ( based on projections) are worth less than dollars earned today ( due to the loss of purchasing power). With this in mind, the “ timing” of projected income or cash flows is a critical factor. Basically, the discounted earnings method for calculating the value of a venture uses a four- step process: