Binding free energy calculations are a physically rigorous approach to prospectively estimate ligand potency, even before the ligand is synthesized. Although initial applications of these methods were reported decades ago, recent advances in computing technology, such as graphical processing units and low-cost parallel computing, have enabled the pharmaceutical industry to routinely and successfully apply these methods to drug discovery projects. First, we review two common computational methods to estimate binding free energy values: relative binding free energy and absolute binding free energy. Then, we introduce a third approach that combines the strengths of these two, giving accurate results and providing an alternative when neither absolute nor relative calculations are well suited to the problem. In this paper we focus on alchemical approaches, which employ an unphysical path to connect two physical end states in order to obtain free energy differences.