Discounted Cash Flow

Free cash flows of the project for next five years can be calculated by adding depreciation values and subtracting changes in working capital from net income. In 2010, there will be a cash outflow of $2.2 million as capital expenditure. In 2011, there will be an additional one time cash outflow of $300,000 as an advertising expense. Using net free cash flow values for next five years and discount rate for discounting, NPV for the project comes out to be $2907, 100. The rate of return at which net present value becomes zero i.e.

Helen easily sells the San Francisco house in which she and Tom live. Helen is the sole owner of the house. However, she has a harder time finding the right home in Portland. Helen has to make several trips to Portland before buying a house under construction. It will not be available for

Present market value of Simon’s home = $250,000. Simon can borrow up to 75 percent of the market value, or $187,500. Simon still owes $100,000 mortgage on his home. Therefore, he can borrow an additional $87,500.

Let us start off by calculating the interest earned over the four years of the mortgage:

It is focused on cash flow rather than accounting practices and allows for different components of a company to be valued separately. Conversely, the biggest challenge of the DCF method is that the determined value is only as accurate as the information it is given, that being the FCF, TV and discount rates. In other words, if the information given to determine the DCF isn’t accurate then the fair value for the investment won’t be accurate and the model won’t be helpful when assessing stock prices due to the inaccuracies. Furthermore, DCF is only good for long term values not short term investing. “The bottom line is that DCF is a rigorous valuation approach that can focus your mind on the right issues, help you see the risk and help you separate winning stocks from losers and help reduce uncertainty.” (McClure, 2011) So, now that we’ve looked at CAPM and DCF, what can we conclude?

Looking at this in terms of an internal rate of return – the one year return can be calculated as ($27.3/24) – 1=.1375 or 13.75% (this number has been rounded up to .14 or 14% in Exhibit 7). Note that whenever this IRR is above 12%, the sequel will be positive NPV.

The DCF does not consider right away the option to turn down a movie if it generates a negative NPV; we had to come up with a way to include that in our model. Also, changes in the future inflows or costs will generate volatility. Finally, we need to remember that the DCF method generates more volatility when the cash flows are uncertain in the future. Since in this example we have inflows 4 years in the future and costs 3 years in the future, we have some variability there that can change the output of the valuation when time comes true.

Luke has been asked to work on a project that involves developing land recently bought by ABC to build an adult entertainment retail store. According to the plan, Luke’s brother, Owen, whom he is very close to, lives in the neighborhood that the adult entertainment retail store plan will be built. Luke knows that as soon as the plans for the store become public, the property value of the homes in Owen’s neighborhood are expected to decrease significantly. Luke is concerned about his confidentiality obligations to the company. Owen has openly expressed to Luke that he has thought about putting his home on the market for sale; this is concerning for Luke. He knows that Owen has received and acceptable offer for his home already, but wonders if the market for real estate in the area will increase in the next few years.

As discounted cash flow method assumes all equity financed acquisition, it presents more comparable value for the real option values shown. The value of Apache’s possibility to decide whether to exploit the reserves equals the difference between DCF value and the real option value.

The free cash flow method is used to gauge “a company’s cash flow beyond that necessary to grow at the current rate… [to ensure companies] make capital expenditures to continue to exist and to grow” (Drake, n.d.). Calculation of free cash flows utilizes various components, including a firm’s value, cash flow forecasts, a firm’s capital structure, the cost of capital, and/or discounted cash flows.

A discounted cash flow analysis measures the value of a company todays based on calculated predications of how much money they will make in the future. This valuation method is used to determine how profitable an investment is. To conduct a DCF analysis, I used future free cash flows predictions ranging from years 2016 through 2026 to get an estimated present value. My ultimate goal in conducting a discounted cash flow analysis for this project is to value to the equity of the stock and find the stock price for the Danaher Corporation.

Sandra Macmillan, one of the founders of Macmillan and Grunski Consulting which provides financial planning services, is now giving a short project to Mary Somkin, the firm¡¯s top secretary. If she can successfully demonstrate her ability and skill of discounted cash flow (DCF) analysis, one of the most important concepts in financial planning, she can expand her role in the firm and broaden her job opportunity.

In particular, small changes in inputs can result in large changes in the value of a company, given the need to project cash-flow to infinity.  James Montier argues that, "while the algebra of DCF is simple, neat and compelling, the implementation becomes a  minefield of problems". He cites, in particular, problems with  estimating cash flows and estimating discount rates. Despite the issues, DCF analysis is very widely used and is perhaps the primary valuation tool amongst the financial analyst community.

This project evaluates the discounted Net Present Value which shows the estimated cash flow. The cash flow forecast is for 10 year which incorporates International complexities as well as the cost of capital.

Project appraisal techniques are used to evaluate possible investment opportunities and to determine which of these opportunities will generate the best return to the firm’s shareholders. Therefore, it is vital for the firm if they wish to continue receiving funds from shareholders to employ the best techniques available when analysing which investment opportunities will give the best return. There are two types of project appraisal techniques: non-discounted cash flows and discounted cash flows. The Net Present Value and internal rate of return, examples of discounted cash flows, are in use in many large corporations and regarded as more effective than the traditional techniques of payback and accounting rate of return. In this paper, I