Introduction to Discounted Cash Flow Analysis and Financial Functions in Excel

The financial and economic analysis of investment projects is typically carried out using the technique of discounted cash flow (DCF) analysis. This module introduces concepts of discounting and DCF analysis for the derivation of project performance criteria such as net present value (NPV), internal rate of return (IRR) and benefit to cost (B/C) ratios. These concepts and criteria are introduced with respect to a simple example, for which calculations using MicroSoft Excel are demonstrated.

Discounted cash flow: accounting for uncertainty

Valuation is the process of estimating price. The methods used to determine value attempt to model the thought processes of the market and thus estimate price by reference to observed historic data. This can be done using either an explicit model, that models the worth calculation of the most likely bidder, or an implicit model, that that uses historic data suitably adjusted as a short cut to determine value by reference to previous similar sales. The former is generally referred to as the Discounted Cash Flow (DCF) model and the latter as the capitalisation (or All Risk Yield) model. However, regardless of the technique used, the valuation will be affected by uncertainties. Uncertainty in the comparable data available; uncertainty in the current and future market conditions and uncertainty in the specific inputs for the subject property. These input uncertainties will translate into an uncertainty with the output figure, the estimate of price. In a previous paper, we have considered the way in which uncertainty is allowed for in the capitalisation model in the UK. In this paper, we extend the analysis to look at the way in which uncertainty can be incorporated into the explicit DCF model. This is done by recognising that the input variables are uncertain and will have a probability distribution pertaining to each of them. Thus buy utilising a probability-based valuation model (using Crystal Ball) it is possible to incorporate uncertainty into the analysis and address the shortcomings of the current model. Although the capitalisation model is discussed, the paper concentrates upon the application of Crystal Ball to the Discounted Cash Flow approach.

Reconciling value estimates from the discounted cash flow model and the residual income model

This paper examines why practitioners and researchers get different estimates of equity value when they use a discounted cash flow (CF) model versus a residual income (RI) model. Both models are derived from the same underlying assumption -- that price is the present value of expected future net dividends discounted at the cost of equity capital -- but in practice and in research they frequently yield different estimates. We argue that the research literature devoted to comparing the accuracy of these two models is misguided; properly implemented, both models yield identical valuations for all firms in all years. We identify how prior research has applied inconsistent assumptions to the two models and show how these seemingly small errors cause surprisingly large differences in the value estimates. [ABSTRACT FROM AUTHOR]

Almirante: Evaluating the board game: Board game, startup, discounted cash flow, venture capital method, real options

This thesis evaluates a start-up company (Jogos Almirante Lda) whose single asset is a board game named Almirante. It aims to conclude whether it makes sense to create a company or just earn copyrights. The thesis analyzes the board game’s market, as part of the general toy’s market, from which some data exists: European countries as well as the USA. In this work it is analyzed the several ways to finance a start-up company and then present an overview of the valuation of the Jogos Almirante based on three different methods: Discounted Cash Flow, Venture Capital Method and Real Options.

Analysis of purchasing activity with discounted cash flow inventory models = Beszerzési tevékenység elemzése diszkontált pénzáramlású készletmodellel

A klasszikus tételnagyság probléma két fontosabb készletezési költséget ragad meg: rendelési és készlettartási költségek. Ebben a dolgozatban a vállalatok készpénz áramlásának a beszerzési tevékenységre gyakorolt hatását vizsgáljuk. Ebben az elemzésben a készpénzáramlási egyenlőséget használjuk, amely nagyban emlékeztet a készletegyenletekre. Eljárásunkban a beszerzési és rendelési folyamatot diszkontálva vizsgáljuk. A költségfüggvény lineáris készpénztartási, a pénzkiadás haszonlehetőség és lineáris kamatköltségből áll. Bemutatjuk a vizsgált modell optimális megoldását. Az optimális megoldást egy számpéldával illusztráljuk. = The classical economic order quantity model has two types of costs: ordering and inventory holding costs. In this paper we try to investigate the effect of purchasing activity on cash flow of a firm. In the examinations we use a cash flow identity similar to that of in inventory modeling. In our approach we analyze the purchasing and ordering process with discounted costs. The cost function of the model consists of linear cash holding, linear opportunity cost of spending cash, and linear interest costs. We show the optimal solution of the proposed model. The optimal solutions will be presented by numerical examples.

The appraisal of data centres: deconstructing the cash flow

This paper analyses the appraisal of a specialized form of real estate - data centres - that has a unique blend of locational, physical and technological characteristics that differentiate it from conventional real estate assets. Market immaturity, limited trading and a lack of pricing signals enhance levels of appraisal uncertainty and disagreement relative to conventional real estate assets. Given the problems of applying standard discounted cash flow, an approach to appraisal is proposed that uses pricing signals from traded cash flows that are similar to the cash flows generated from data centres. Based upon ‘the law of one price’, it is assumed that two assets that are expected to generate identical cash flows in the future must have the same value now. It is suggested that the expected cash flow of assets should be analysed over the life cycle of the building. Corporate bond yields are used to provide a proxy for the appropriate discount rates for lease income. Since liabilities are quite diverse, a number of proxies are suggested as discount and capitalisation rates including indexed-linked, fixed interest and zero-coupon bonds.

Criação de valor em fusões e aquisições horizontais

O aumento verificado nos últimos anos em fusões e aquisições (F&A) resulta da opção dos gestores para fazer face ao aumento da pressão competitiva e ou à necessidade de crescimento rápido. A literatura sobre os efeitos dos processos de F&A é diversificada e as conclusões são contraditórias. Neste trabalho pretendemos verificar se o processo de F&A se traduz na criação de valor para o acionista da empresa adquirente. Como métrica de avaliação utilizamos o método de análise dos fluxos de caixa atualizados ou o Discounted Cash-Flow (DCF). Para o efeito efetuamos um estudo de caso que vai incidir sobre uma empresa seguradora portuguesa – A Lusitania Companhia de Seguros, S.A. – que recentemente adquiriu, por fusão por incorporação, a Real Seguros, S.A. Efetuamos uma análise de natureza quantitativa através dos dados do relatório e contas e encontramos evidência de que o desempenho diminuiu após a transação.

Valuation and arbitrage

The use of discounted cash flow (DCF) methods in investment valuation and appraisal is argued by many academics as being rational and more rigorous than the traditional capitalisation model. However those advocates of DCF should be cautious in their claims for rationality. The various DCF models all rely upon an all-encompassing equated yield (IRR) within the calculation. This paper will argue that this is a simplification of the risk perception which the investor places on the income profile from property. In determining the long term capital value of a property an 'average' DCF method will produce the 'correct' price, however, the individual short term values of each cash-flow may differ significantly. In the UK property market today, where we are facing a period in which prices are not expected to rise generally at the same rate or with such persistence as hitherto, investors and tenants are increasingly concerned with the down side implications of rental growth and investors may indeed be interested in trading property over a shorter investment horizon than they had originally planned. The purpose of this paper is therefore to bring to the analysis a rigorous framework which can be used to analyse the constituent cash flows within the freehold valuation. We show that the arbitrage analysis lends itself to segregating the capital value of the cash flows in a way which is more appropriate for financial investors

Avaliação de projetos de mineração utilizando a teoria das opções reais em tempo discreto : um estudo de caso em mineração de ferro

Estudo da teoria das opções reais que incorpora à avaliação de projetos de investimentos, as opções de crescimento e as flexibilidades gerenciais que surgem devido às incertezas existentes no ambiente no qual as empresas operam. Aborda os métodos tradicionais de avaliação de investimentos baseados no fluxo de caixa descontado (FCD), destaca as suas vantagens e limitações; a teoria das opções reais mostrando suas vantagens em relação aos métodos tradicionais; e um estudo de caso. Tem como objetivo principal apresentar que a teoria das opções reais é viável e complementar aos métodos tradicionais de avaliação de investimentos na indústria de mineração de ferro, com a abordagem da avaliação em tempo discreto. Este método permite especificar o problema de análise e resolvê-lo com o uso de programa de software de análise de decisão disponível no mercado de forma mais simples e mais intuitivo que os métodos tradicionais de avaliação de opções reais e permite maior flexibilidade na modelagem do problema de avaliação. A modelagem das opções reais do projeto baseia-se no uso de árvore de decisão binomial para modelar o processo estocástico. A avaliação é realizada em quatro passos de acordo com a metodologia proposta por Copeland e Antikarov (2001) e Brandão e Dyer (2005): modelagem do ativo básico, ou seja, cálculo do valor presente líquido sem flexibilidade; criação do modelo binomial utilizando o software computacional para modelar o ativo básico, computando as probabilidades neutras a risco; modelagem das opções reais no projeto; e resolução da árvore binomial, ou seja, análise das opções reais. Os resultados apresentados demonstram que é possível implementar a abordagem da avaliação de opções reais em projetos de investimentos na indústria de mineração de ferro.

Análise de investimento em confinamento bovino no centro-oeste brasileiro: um estudo de caso.

This study analyzed the economic viability of an investment in feedlot cattle on a farm in the midsize state of Goias. The research identified that different thematic studies whose interests have focused mainly on cost analysis and profitability punctual. Differently, this study used the approaches of the Discounted Cash Flow (DCF) and the Real Options Theory (ROT). The first used the projected cash flow for 10 years and a discount rate determined by CAPM at 8% p.a. for containment of heads 400. The second was modeled by the binomial model of Cox, Ross and Rubinstein (1979) incorporating the option of waiting. This methodology has not been employed in Brazilian cattle industry. The search results pointed to the economic viability of the project when considered possible scenarios for the different price ranges of the ox that state bushel. In addition, the TOR proved to be a more robust tool for investment analysis, by incorporating the flexibility of farmers to wait for the right time to make the confinement.

Osakkeiden yhtiöoikeudellinen vaihdannan rajoittaminen ja VC-DCF -arvonmäärityksen käyttömahdollisuudet osakkeenomistajan irtaantuessa kasvuyhtiöstä

Yhtiöoikeus, yhtiöoikeuden reunaehtojen mukainen yhtiöjärjestys ja osakassopimus määrittävät kolme sääntelytasoa osakkeenomistajan irtaantuessa osakeyhtiöstä. Ulkopuolisen pääomasijoittajan liittyminen kohdeyhtiön vähemmistöosakkeenomistajaksi edellyttää monipuolista sopimista ja räätälöityjen määräys- ja sopimuslausekkeiden käyttöä yhtiöjärjestyksessä ja osakassopimuksessa tulevaa etukäteen sovittua irtaantumista varten. Yhtiöoikeudellinen määräystaso yhtiöjärjestyksessä, jota täydennetään osakeyhtiölain tahdonvaltaisella säännöstöllä, luo edellytykset osakkeenomistajien välisen riskienhallinnan toteuttamiseksi osakassopimuksessa. Osakeyhtiölain mukaisilla pakottavilla exit-oikeuksilla ja erikseen määritellyillä irtaantumistavoilla voi olla erilaiset arvonmääritystavat. Erityisen arvonmääritystavan valinta ja sen liittäminen sopimuskokonaisuuteen on syytä tehdä harkitusti niin, että irtaantumistilanteet määritetään tapauskohtaisesti etukäteen. Start-up -vaiheessa tapahtuvan rahoituksen kiertokulkusuunnittelun ja arvonmäärityksen siirryttäessä Venture Capital-arvonmäärityksestä kasvuvaiheen diskontattujen kassavirtojen DCF-arvonmääritysmalliin tulee olla yhteensovitettuja yhtiöoikeudellisesti ja sopimusoikeudellisesti. Erilaisten kauppahintamekanismien vaikutukset lunastushintaan on tunnistettava. Yrityksen rahoituksen eri kehitysvaiheita kuvaavaa yhdistettyä VC-DCF -arvonmääritysmallia on tarpeellista käyttää tietyissä tilanteissa, koska VC-menetelmä ei itse pysty ratkaisemaan kaikkia fundamentaalista tarvetta vaativia arvonmääritysvaiheita. Työssä esitetään erilaiset irtaantumisvaihtoehdot ja tarvittavien DCF-arvonmäärityskomponenttien sisältö ja käyttömahdollisuudet, joilla voidaan pienentää vähemmistöosakkeenomistajan riskiä ja tuottovaatimusta.

As variáveis condicionantes da previsão do cash flow operacional aplicado às Empresas Portuguesas de vestuário e calçado

O presente artigo tem por finalidade analisar os factores condicionantes da previsão do cash flow proveniente da actividade operacional, através do desenvolvimento de um modelo econométrico que foi estimado com base numa amostra seccional relativa ao ano de 2000 e constituída por 395 empresas portuguesas dos sectores do vestuário e calçado. O modelo foi estimado através do método de mínimos quadrados ordinário (MQO) com a correcção de White e, os resultados obtidos mostraram que o cash flow futuro é explicado pelas variáveis explicativas; recursos gerados na actividade operacional, dívidas de e a terceiros provenientes da actividade operacional e uma variável dummy que diferencia as empresas pelos dois sectores de actividade, todas desfasadas de um período (ano).

Does direct cash flow presentation help in predicting future operating cash flow?

A Work Project, presented as part of the requirements for the Award of a Masters Degree in Finance from the NOVA – School of Business and Economics