The Value Of The Cash Flow - 1324 Words

Part: B Net Present Value (NPV) calculates the present value of the cash flow which is based on the opportunity cost of capital and comes up with a value that is added to the wealth of the shareholders if that project is accepted. Apart from Net present Value (NPV) there are a couple of more methods for investment appraisal such as internal rate of return (IRR), Payback period (PBP) and Profitability Index (PI). Net Present Value (NPV) vs. Payback Period (PBP): Payback period calculates the period in which the initial amount invested in the project is recovered. The project is accepted or rejected based on the benchmark set by the firm. If the payback period is less than or equal to the benchmark the firm will accept the project and†¦show more content†¦Such a problem does not exist with NPV. Net Present Value (NPV) vs. Profitability Index (PI) Profitability index is a ratio between the discounted cash inflow to the initial cash outflow. It presents a value which says how many times of the investment is the returns in the form of discounted cash flows. The disadvantage associated with this method again is its relativity. A project can have same profitability index with different investments and vast difference in absolute dollar return. NPV has an upper hand in this case. Conclusion: We have noted that almost all the difficulties are survived by net present value and that is why it is considered to be the best way to analyze, evaluate, and select big investment projects. At the same time, the estimation of cash flows requires carefulness because if the cash flow estimation is wrong, NPV is bound to be misleading. A small problem with NPV is that it also considers the same discounting rate for both cash inflow and outflows. We know that there are differences between borrowing and lending rates. Modified internal rate of return is another method which is little more complex but improved which takes care of the difference between borrowing and lending rates also as it discounts cash inflows at lending rates and cash outflow at borrowing rates. Part: C According to International Energy Agency (2015), energy demand will grow byShow MoreRelatedThe Value Of Cash Flow951 Words   |  4 Pagesa) Discounted Cash Flow (DCF) valuations aims to establish the value of operating business on a ’cash free/debt free’ basis and therefore it is normally undertaken using ungeared cash flows. The value of the business should remain the same regardless of its financial structure. In case that geared cash flow is used in an equity model valuation, it should be discounted at the cost of equity capital and not a weighted average cost of capital (WACC). This approach estimates the shareholders’ net returnsRead MoreArcadian: Cash Flow and Terminal Value1103 Words   |  5 Pagesterminal value (TV) a material component of firm values? From the exhibit, we can find the PV of five years’ dividends is small part of the market price of the stock. In my opinion, we buy a stock then get dividend periodically, which like buy a bond. The coupon payment is dividend and the face value is terminal value. The bond value is determined by the terminal value mostly. So the stock price is also determined by terminal value. The concept of going concern can explain that Terminal value is oftenRead MoreNet Present Value and Cash Flow1400 Words   |  6 Pages000. Assuming a company tax rate of 30%, the firm’s cash flow from operations is: (A) $840,000 (B) $180,000 (C) $135,000 (D) $75,000 4. 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The net cash flow from the operating activities increased by 45% to $340.45 million from $338.94 million in the prior year. The strong underlying sales performance is due to the increase of franchise fees of 7.2% or $47.44 million which is from $661.86 million (2014) to $709.3 million (2015). There is also decrease in tactical support to franchise during 2015Read MoreNet Present Value and Free Cash Flow Essay example1101 Words   |  5 PagesGiven the proposed financing plan, describe your approach (qualitatively) to value AirThread. Should Ms. Zhang use WACC, APV or some combination thereof? Explain. (2 points) * From the statement of AirThread case, we know that American Cable Communication want to raise capital by Leveraged Buyout (LBO) approach. This means ACC will finance money though equity and debt to buy AirThread and pay the debt by the cash flows or assets of AirThread. * In another word, it’s a highly levered transactionRead MoreDescribe How Value-Added Is Calculated. to What Extent Are Value Added, Cash Flow, and Profit Connected to a Company’s Sales Performance?1822 Words   |  8 PagesDescribe how value-added is calculated. To what extent are value added, cash flow, and profit connected to a company’s sales performance? Throughout this essay I will be exploring how value added is calculated and to what extent value added, cash flow and profit are connected to a company’s sales performance. 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Managers can get real option value by doing decisions on time and flexible about firm’s opportunities and capabilities. There are four main parts in the manager’s work box for investment valuation opportunities.  ¬ Net Present Values  ¬ Accounting rated of return  ¬ Real Options  ¬ Payback rules NPV implement require estimates of appropriate discount rate and expected cash flows. And there’s