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The concept of windage growth rate in value investing refers to the expected rate at which a company's free cash flow will grow over time. This rate is used to calculate the future value of the company's cash flow, which is then used to determine the company's intrinsic value. The windage growth rate is determined through thorough research of the company's financial outlook and competitive advantage, or 'moat'. For example, if a company has a free cash flow of $1,500 and a windage growth rate of 16%, the investor would multiply $1,500 by 16% to calculate the growth of the cash flow for the next year. This calculation is then carried forward cumulatively for a certain period (e.g., eight years) to determine the payback time price of the company.
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Remember, you came up with the windage growth rate when you were researching the company's moat and financial outlook. Now, compound that free cash flow every year by your windage growth rate, for a period of eight years. For example, say you have a lemonade stand with a free cash flow of $1,500 and you've decided it's windage growth rate is 16%. Multiply $1,500 by 16% and you get $240; now carry the calculation forward, cumulatively for eight years. The result is a payback time price for the lemonade stand of $24,778 – if you pay that amount for the company today, in eight years you will have your whole purchase price back.
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