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We propose an industry volatility spillover index and find that this new predictor has an impressive in-sample and out-of-sample predictability of aggregate stock returns. A one-standard-deviation increase in this index leads to a 4.14% increase in the expected excess return over the next month. Furthermore, a mean-variance investor can realize sizable economic gains by using this spillover index in his/her asset allocation. The forecasting power of the spillover index remains significant after controlling for popular economic variables and newly proposed predictors. Due to the absence of learning, the spillover index shows increasing predictive ability over the recent period. The economic origins of the spillover index's success stem from both the cash flow and discount rate channels, as well as significant association with investor sentiment and tail risk. The return predictability of this index is pervasive across characteristic-sorted portfolios and is particularly strong for large-cap or difficult-to-value stocks. [ABSTRACT FROM AUTHOR]

Decisions by states to cancel oil and gas licenses in the transition to net-zero emissions can trigger investment arbitration claims. Given the massive damages that arbitration tribunals can award to investors, investment arbitration is increasingly being criticized as an obstacle to climate change mitigation and the just energy transition. Under the Discounted Cash Flow (DCF) method, tribunals have based their valuation on the expected production volumes during the remaining lifetime of oilfields and forecasts of international oil prices, essentially requiring states to compensate companies at market conditions for all energy left underground. With an increasing number of carbon neutrality pledges at the global level and states' due diligence obligation to reduce emissions, this article argues that tribunals can no longer ignore decarbonization considerations in the application of the DCF method. Damages decisions must instead account for the price, production cost and risk expectations under net-zero pathways. Significant downward adjustments to the estimated future income of hydrocarbon assets can be achieved by using the lower oil price forecasts in net-zero emissions scenarios, instead of current market conditions. Adjusting future cash flow projections and the discount rate to reflect carbon pricing and other climate policy risks can significantly lower the present value of hydrocarbon assets. As arbitration tribunals have so far ignored decarbonization in their oil damages calculations, legal reforms are needed to require the alignment of investor compensation to decarbonization and ensure a just energy transition. [ABSTRACT FROM AUTHOR]

There is growing awareness that traditional valuation methods based on discounted cash flows using constant risk-adjusted discount rates struggle to account for climate-related risks when assessing long-term investments in physical assets and infrastructure. Worst yet, such methods fail to consider numerous financial benefits accruing from investment in resilience and adaptation, categorizing such expenditures as sunk costs that reduce investors' returns. Such traditional valuation methods encourage investors to postpone or forgo entirely investing in resilience and adaptation. The decoupled net present value (DNPV) method incorporates risk and risk-reduction measures into project valuations in clear and compelling financial terms. By quantifying both (i) risk exposures of assets to hazards and (ii) the reduction of such exposure through up-front investments, DNPV recasts the financial impact of risk-reduction measures. Thus, the benefits of risk-reducing investments such as adaptation and resilience can be fully valorized in project-level accounting, removing a significant barrier facing such investments today. [ABSTRACT FROM AUTHOR]

Real-world market quotes of bonds can sometimes contradict the no arbitrage principle within the discounted cash flow model. This makes some kinds of no-arbitrage-based analyses impossible, e.g., inferring the bounds for the term structure of interest rates. Instead of using a more sophisticated model to account for pricing peculiarities, we propose a replacement for the no arbitrage principle. While being theoretically plausible, it does not get contradicted by the data – thus, we can infer the same kind of term structure bounds from it, even given the contradictions with the no arbitrage principle. Using a dataset of Russian sovereign bond quotes, we show that the no arbitrage inconsistency problem arises in 10–20% of cases and that the proposed approach successfully overcomes it. [ABSTRACT FROM AUTHOR]

The informational content of prices hypothesis in Modigliani and Miller (and Fisher before them) advocates that organizations' market prices could somehow estimate their growth prospects and intangible assets. For this estimation, discounted cash flow models are frequently employed. However, these models require information about monetary flows and discount rates in the long future, which are most difficult to confirm in the moment of the analysis. Thus, Tobin's q or similar procedures as the market-to-book value of the firm have been claimed (and presupposed) as evidence that markets could identify growth prospects and intangible assets. Indeed, Tobin's q tends to be higher for new and/or intangible intensive firms. Nevertheless, we know that for q > 1, less debt tends to imply a higher q, whereas the inverse holds for the less frequent q < 1. To explain this phenomenon, we propose a "mechanical effect hypothesis" describing an automatic relationship between q and capital structures at the variable computation. Accordingly, as intangible-intensive and/or new firms are likely to have q > 1 and less debt, a mechanical effect increases their q-values without requiring growth perspectives, or intangibles. Hence, this new hypothesis disputes Fisher-Modigliani-Miller's utilization of discounted cash flow models to explain markets and prices. [ABSTRACT FROM AUTHOR]

In this paper, we discuss the resource–constrained project scheduling problem with discounted cash flows. We introduce a new schedule construction technique which moves sets of activities to improve the project net present value and consists of two steps. In particular, the inclusion of individual activities into sets, which are then moved together, is crucial in both steps. The first step groups the activities based on the predecessors and successors in the project network, and adds these activities to a set based on their finish time and cash flow. The second step on the contrary does so based on the neighbouring activities in the schedule, which may but need not include precedence related activities. The proposed scheduling method is implemented in a genetic algorithm metaheuristic and we employ a penalty function to improve the algorithm’s feasibility with respect to a tight deadline. All steps of the proposed solution methodology are tested in detail and an extensive computational experiment shows that our results are competitive with existing work. [ABSTRACT FROM PUBLISHER]

In this paper, we investigate the risks of cash flow news and discount rate news exposed to durable consumption. When utility is nonseparable in nondurable and durable consumption, the optimal portfolio allocation implies a linear factor model in nondurable and durable consumption growth. Using 30 portfolios sorted by book-to-market, momentum and size, we find that the differences in these betas account for more than 70% of the cross-sectional variation in the risk premia. [ABSTRACT FROM AUTHOR]

Traditional scheduling problems are usually focused on minimising time-based objectives. In this paper, we have examined the problems in single and parallel machine scheduling. We have incorporated cash management into the objective function of these problems. It is assumed that processing a given job involves incurring a total cost and receiving a total revenue. Each job also has its own temporal pattern of cost incurring and revenue receiving. Nonetheless, the total cost/revenue of processing a job is assumed to be incurred/received during its processing and not beyond it. We have defined five new objectives: (i) maximising average available cash; (ii) minimising revenue-cost duration; (iii) minimising average cash deficiency; (iv) minimising maximum cash deficiency; and (v) maximising minimum available cash. Based on the results achieved in this paper, the above patterns do not affect the optimal scheduling policy in regards to the first two objectives. For single machine models, all except one of the problems are solved in polynomial time. For parallel machines, all models are proved to be NP-hard. Some of the NP-hard models are convertible to equivalent traditional ones. [ABSTRACT FROM AUTHOR]

Real estate development has received less scrutiny than real estate investment in terms of appraisal practices and performance measurement. This is despite the inherent uncertainty and financial risks associated with development as an activity. We investigate market practices regarding performance metrics and return expectations both for residential and commercial real estate development in the UK, exploring what is considered as an appropriate return and how this varies according to type and duration of scheme, and method of appraisal used. After examining the literature and the information available on ex-post returns from development activity, results from a survey of real estate developers are reported, supplemented by findings from interviews. The results suggest that the use of traditional residual valuation techniques dominates discounted cash flow models when appraising development projects, particularly among residential developers, while profit-on-cost and profit-on-value are the most popular metrics for quantifying required returns. Unlike NPV or IRR, these metrics do not account for the timing of cash flows, raising questions about the robustness of appraisals in this sector. Such metrics might suffice if required profits are adjusted in ways that are consistent with scheme duration and risks, but it is unclear that this is currently the case. [ABSTRACT FROM AUTHOR]

According to environmental considerations, the traditional supply chain has replaced with a closed-loop supply chain. This study attempts to design the polyethylene tanks closed-loop supply chain network under uncertainty. The proposed network contains various levels such as suppliers, manufacturing plants, distribution warehouses, and retailers. A mixed integer linear programming model is developed with a single-objective, multiple products and multiple periods. Besides, after-sales service is considered that has economic and environmental effects on the supply chain and leads to customers' satisfaction and loyalty. To deal with uncertainty, possibilistic programming is used. Therefore, some parameters of the model are considered as a fuzzy number with a triangular probability distribution. Also, a method based on decision tree and discounted cash flow is utilized to analyze the problem in multiple periods. Furthermore, to validate and show the applicability of the proposed model, a real case study is performed in the polyethylene tanks industry. Finally, the sensitivity analysis is used to check the robustness of the proposed model and framework. The results show that the net present value of the supply chain under new condition is increased by 0.8%. The results of this research can be useful for managers of the organizations. [ABSTRACT FROM AUTHOR]

The traditional discounted cash flow (DCF) model is generally used to estimate the present value of an enterprise or its equity based on expected future parameters such as cash flows, growth rate and discount rate. In the last decade, the reverse DCF model has gained popularity. With this approach, the valuer uses the current market capitalization as a fixed input and seeks those 'critical' values of individual valuation parameters, which – assuming all other parameters remain unchanged – result in a value equal to current market value. This provides a point of comparison for the company's realized performance and may provide insights regarding over or undervaluation. In this study, we develop a novel DCF model and conduct empirical analysis using data of 1001 US manufacturing, service, retail and financial companies. We examine pricing errors and market corrections in the post-crisis era based on the critical cash flow ratio defined in our reverse model. We find evidence of a general undervaluation in US stock markets with different pricing error patterns across industries. Our results confirm market correction mechanisms have worked properly in the post-crisis era with an average reaction time of 2 years, suggesting investors have learned from the crisis. [ABSTRACT FROM AUTHOR]

The inability of existing analytical models to accurately predict future events has, at times, led to the economic failure of mining operations whose financial viabilities were determined based on static assumptions, leaving operational managers with little room to make future decisions. Therefore, the application of a robust decision-making tool, such as Real Options (RO) can minimise losses and more accurately express uncertainty. This paper has considered a stochastic simulation to analyse ROs for a real case iron ore mine, which closed in April 2016. In comparing the net present value from the traditional discounted cash flow (DCF) method to delay, to abandon the operations and to stage the investment options, the ROs method increased the project value by between 56% and 195% depending on the volatility. As a new contribution, a managerial flexibility domain map is proposed in this paper. Thus, flexibility in mining operations creates agility, increases value and mitigates financial losses. [ABSTRACT FROM AUTHOR]

Stochastic optimisation provides a framework that is capable of generating a strategic life-of-mine production schedule that increases net present value while simultaneously reducing the risk associated with geological uncertainty. This paper focuses on the application of the stochastic strategic mine planning for technical risk management in the KéMag iron ore deposit in Quebec, Canada, demonstrating the key steps of the framework. The approach first quantifies both the volumetric and multi-element grade uncertainty of the deposit by generating a set of equally probable scenarios of the orebody. In this case study, the boundaries of the lithologies (volumetric uncertainty) defining the KéMag iron ore deposit are generated using a pattern-based wavelet simulation algorithm. The pertinent grade properties, namely, head iron, Davis Tube weight recovery, Davis Tube concentrate iron and silica content (multi-element grade uncertainty) are jointly simulated using the direct block minimum/maximum autocorrelation factors algorithm. Subsequently, the simulated scenarios of the iron deposit serve as an input to a life-of-mine stochastic integer programming production-scheduling model. The latter stochastic optimisation model is employed to manage and minimize the risk associated with the geological uncertainty of the deposit in terms of meeting production targets while generating a mining sequence of extraction maximising the net present value. The results of the case study quantify the risk associated with the product's silica content, total iron production and expected discounted annual cash flows. [ABSTRACT FROM AUTHOR]

This paper starts with the premise that marketing should be accountable, and considers by which measure or measures it should be held to account. "Marketing" for the purposes of this paper is defined as satisfying customers and thereby maximising net inward cash flow. This suggests that marketing performance can and should be evaluated financially, ideally with a single number, or "silver metric". The authors review the arguments for and against silver metrics in general and, in particular, three popular candidates: ROI, Discounted Cash Flow (DCF) and Return on Customer. So far as performance evaluation is concerned, six objections to the use of ROI, five to the use of DCF and four to Return on Customer are identified. Furthermore, the authors highlight the critical and potentially misleading role of forecasts as benchmarks for performance assessment. At the same time, the value of DCF techniques, such as customer equity and customer lifetime value, is recognised for planning purposes. A more satisfactory means for assessing marketing performance is net profit plus any enhancement of the marketing asset albeit that requires multiple metrics, taken together as a proxy for future cash flows. [ABSTRACT FROM AUTHOR]

The objective of this work is to describe a method of assessing the flexibility of a manufacturing system, in an uncertain market environment, under lifecycle considerations. The flexibility of a manufacturing system is determined by statistical analysis of the discounted cash flow (DCF) estimates of the manufacturing system's lifecycle cost, over a time horizon and for a large variety of market scenarios. The system's lifecycle cost is calculated at a minimum level with the help of a specially developed algorithm. The method is used in a test case for investing in a production system, using real-life data derived from the automotive industry. [ABSTRACT FROM AUTHOR]

We propose a method for valuing new, recoverable, and recovered assemblies (products, components, parts, etc.) in production systems with reverse logistics. Values of assemblies influence their opportunity holding cost rates and are hence essential for comparing inventory strategies in average cost models. We argue that the proposed method is 'correct' from a discounted cash flow (DCF) point of view. We refer to some previous results on valuing assemblies in systems without disassembly of returned products that seem to confirm this. Furthermore, we test the method for a specific example with disassembly of returned products. The simulation results indicate that the method indeed leads to (nearly) DCF optimal inventory strategies. [ABSTRACT FROM AUTHOR]

Once the leadership team does the hard work of convincing an organization to look beyond its operational environment, the first question is often how far into the future the organization should forecast. Companies that enter the market early often build the wrong product for the wrong customer. Using minimum viable prototypes and constantly evolving products, designed with consumer input, can allow companies to enter markets in small ways and adapt products to scale when and how the consumer is ready for them (Crews [3]). However, many companies still use more traditional development process, clinging to a develop-and-launch-at-scale mentality, which is particularly dangerous when the company overestimates the market's growth in the near term. [Extracted from the article]

Demonstrating the economic rationality of investments in energy efficiency is a necessary step in reducing the energy consumption of buildings. Generally, financial instruments are evaluated according to both the return on investment and the risk. However, many previous studies of energy efficiency investments in buildings are based on deterministic scenarios and do not evaluate the risk levels of these investments. Therefore, in this study, we clarify the risk involved in an energy-saving investment by calculating the probability distribution of the energy reduction and evaluating the result using financial engineering methods. We first develop a stochastic model of various conditions that affect the energy consumption of a building. These conditions include weather processes, office worker behavior, tenant characteristics, and tenant replacements. Next, we construct a prediction model of a building's energy consumption, and we use our stochastic model to create the boundary conditions of this prediction model. By repeatedly performing energy consumption predictions using the Monte Carlo method, we can obtain the probability distribution for building energy consumption. Finally, given this probability distribution, we evaluate energy efficiency investments using financial engineering methods. Based on the discounted cash flow distribution, we calculate the risk premium of each energy efficiency investment, and, based on the variance and covariance matrix of the internal rate of return of each energy efficiency investment, we find the optimal investment ratio. [ABSTRACT FROM AUTHOR]

As the dry bulk shipping market seems to have been stuck in a trough period for a long time, investors need to pay more attention to their investment strategies to survive during this period. This study aimed to find a suitable model to assess dry bulk ship investment decisions in the tough and peak periods based on real options theories. Two options, involving an abandonment option and a deferrable option, were used to define investors' responses to the uncertainty in investment processes such as stopping or selling vessels. The option valuation was solved by using a binomial valuation model, due to data limitations. In accordance with shipping cycle theories, different volatility parameters for the tough and peak periods were calculated using a generalized autoregressive conditional heteroskedasticity (GARCH) model. The application of the real options model to a case study involving secondhand ship trading indicated its viability. According to the results of the case study, the new model has advantages over the traditional net present value (NPV) method in uncertain investment environments. Thus, the results demonstrate that the real options model is a more suitable method for use in the current dry bulk shipping market. [ABSTRACT FROM AUTHOR]

In a recent study by Gurnani (1983). 'Economic analysis of inventory systems', three main conclusions were presented. (1) The inventory models analysed in his paper demonstrate that the inventory policy derived from the discounted (PW) cost differs substantially from that given by the traditional undiscounted inventory analysis (2) The difference between the two depends upon the discounting rate. The discounting causes the optimum order quantity and correspondingly the period length to vary monotonically with the discounting rate. (3) However, it is not influenced by the inventory systems planning horizon. This paper first examines each conclusion and demonstrates why his conclusions are either unfounded or irrelevant to his analysis. Next, some crucial derivational errors in his exposition are demonstrated via corrected formulations. Finally, a net present value maximizing framework that is consistent with modern theory of financial analysis, is suggested for the economic analysis of inventory systems. [ABSTRACT FROM AUTHOR]

On the basis of the method for managing the end of life of CdTe photovoltaic panels previously proposed by the authors, a new method for the recycling of all types of thin-film panels (CdTe, a-Si and CIS/CIGS) has been developed and optimised under a research project founded by Enel Foundation and CRUI Foundation. The DGP process has been developed through a feasibility study carried out from three points of view: technical, environmental and economic. The process is composed by two sub-processes matched to each other, one suitable for CdTe panels (named DGPa) and the other one for a-Si and CIS/CIGS panels (DGPb). The Double Green Panel process is based mainly on mechanical treatments with a minimum use of chemicals and it is characterised by a greater level of automation and a high flexibility in production capacity. The potential environmental impacts of various configurations of the DGP process have been extensively analysed with LCA tool in order to develop an environmentally friendly process. The economic feasibility has been assessed through the Discounted Cash Flow Analysis (DCFA) method. The revenues associated to the recovery of valuable and common materials and the recycling costs have been taken into account. [ABSTRACT FROM AUTHOR]

Environmental sustainability in real estate continues to be of interest, and various government incentives have emerged to encourage investment in sustainability efforts. In this detailed case study, we examine one incentive, the Federal National Mortgage Association's (Fannie Mae) Green Initiative and Green Globes certification, as applied to a newly constructed multifamily complex. Using a discounted cash flow model with several scenarios, the after-tax returns for the multifamily project are examined. In this case study, we analyze the initiative's impact on the project, showing the effects of the lower financing costs. The conclusion is that in addition to societal benefits, lower operating costs, and higher rents, the rate of return can be higher for properties that utilize Green Globe's special financing. [ABSTRACT FROM AUTHOR]

Supply chain management principles were analysed by investigating the effects of smaller-scale and incremental interventions in a forest-to-mill value chain on financial returns and forest resource use in an Eastern Cape case study area. Three previous studies provided input by determining fibre balances, a terrain factor, and primary and secondary transport travel speeds and efficiencies. Network analysis, combined with raster-based GIS, analysed different primary and secondary transport scenarios. The forest road network was repeatedly refined through theoretical removal of lower-class roads and subsequent upgrades of remaining roads, and the timber resource flowed over the remaining road network to the mill. Four road networks, including the existing and unrefined network, were studied. With sequentially improved secondary transport travel speeds, primary transport efficiency and fibre use, the net financial returns of the various scenarios were determined by applying discounted cash flow analysis (NPV). To address all possible combinations, 144 unique scenarios were created. The highest NPV achieved was R300.8 million associated with a highly upgraded road network and associated fast secondary transport speeds, cable skidder extraction, motor-manual felling and cross-cutting at the merchandising yard, all factors at optimal performance. The lowest NPV was R40.4 million associated with a simplified road network, low secondary transport speeds, cable skidder extraction, mechanised felling, and roadside merchandising and at status quo systems performance. Examination of individual factors found systems performance, secondary transport speeds and road network had the greatest influence, with systems performance and fibre losses providing the largest impact. Secondary transport speed followed as nine of the top 10 NPV scenarios were achieved with the highest possible road design speeds. Higher-class networks consistently outperformed the baseline and simplified scenarios. Harvesting system had limited effect. When operating at peak performance, using a merchandising yard becomes a better choice. There was no clear difference in terms of felling method or skidder type. It is clear that the optimised use of potentially the most productive machine, for example in one system, does not provide the best final results and that it is the basic harmonisation of all factors that must be taken into account. As in all three previous and related studies, the human element played a role. [ABSTRACT FROM AUTHOR]

Deterministic discounted cash flow (DCF) analysis is a well-accepted technique in engineering appraisals. Common practice is to incorporate all uncertainty influences within a single variable—namely, the discount rate—which also represents the time value of money. Commentary already exists in the literature that such a practice is expedient but not rational and has shortcomings. This article examines the error involved in this practice and provides guidelines and precautions for using blanket or constant discount rates in dealing with uncertainties. It shows the adjustments necessary for any given investment scenario. This is done through establishing equivalence of the expected utility of deterministic and probabilistic present worth, allowing a rate adjustment to be calculated. Numerical studies look at the relationship or trends of this rate adjustment to the key analysis variables. Generally, it is found that the rate adjustment should be decreased as the timing of a cash flow's occurrence increases, increased as the variance of the cash flow increases, kept almost as an additive constant as the base rate increases, and increased as the investor's level of risk aversion increases. The article provides practitioner-friendly usable guidelines for adjusting rates, something that is unavailable elsewhere in the literature. [ABSTRACT FROM PUBLISHER]

Cash flows generated by mining projects tend to be volatile and are extensively influenced by exogenous variables, notably commodity prices and exchange rates. The traditional discounted cash flow (DCF) method, which is normally used for economic feasibility studies and mining project evaluations, presents inconsistencies because the method fails to adequately address uncertainties and operational flexibilities and often ignores certain specific market conditions. Numerous studies have been carried out for mining project evaluations using the real options valuation (ROV) technique for assessing commodity price uncertainty, but there is no research on the combined effects of price and exchange rate uncertainties. Therefore, in order to assess the economic viability of a mining project more accurately, the commodity price and its inherent volatility, the exchange rate and its inherent volatility, and the correlation parameters between them have been incorporated into the model and used in the evaluation process. One of the interesting findings revealed in the study is that project values are overestimated if only commodity price uncertainty is considered in evaluating the project value instead of the joint effect of commodity price and exchange rate uncertainties. This new ROV technique will explore the opportunity to utilize an alternative methodology for approximating project values and to identify valuation opportunities to enhance economic gains or to mitigate economic losses, where the DCF valuation method does not. [ABSTRACT FROM AUTHOR]

Learning the pre-limited liability value process of equity claims and its relationship to the stock price is an answer to the financial jeopardy question when observed option prices are the answer being given by the market. Constant dollar equity holder values, prior to the imposition of limited liability, are the signed conditional expectations of the integral of discounted net residual equity claims through all time. The stock is modelled as a limited liability claim imputing positive dividend flows to shareholders in certain circumstances coupled with a call option written on the integral of all discounted net residual equity claims. The underlying signed value has a known characteristic function when revenues and expenses are modelled as independent gamma processes. The stock price is a positive function of this signed underlying value, given by the solution of a partial integro differential equation. Options on the stock are then options on this function of the signed underlying value and are solved for using its density obtained by Fourier inversion of the characteristic function. The calibration of model parameters, the imputed dividend function and the terminal call strike is conducted on option prices at a single maturity for four underliers,andIn all these cases it is observed that risk neutrally up moves arrive more frequently and are generally smaller while down moves are less frequent and are larger. The terminal option strikes were in the money forand, and out of the money forand [ABSTRACT FROM AUTHOR]

Since the 2008 global financial crisis, mining projects have to invariably compete for scarce capital under depressed market conditions. The discounted cash flow analysis commonly used for the valuation of mining projects relies on using a discount rate. However, an appropriate discount rate is sometimes the subject of contestation since factors such as the stage of development of the mineral project affect the rate. This paper independently tests the reliability of capital asset pricing model and Gordon’s wealth growth model estimates of cost of equity in discount rates and concludes that Gordon’s wealth growth model provides better estimates under depressed market conditions. [ABSTRACT FROM AUTHOR]

Discount rates are often elicited using incentivized or hypothetical multiple price lists. We conduct two multiple price lists according to Coller and Williams (Experimental Economics2: 107–127, 1999) with varying ranges of larger–later payments. Participants carry out both tasks and are randomly assigned to a task order as well as to a payment or no-payment treatment. Our results indicate that the range of the first completed task anchors discount rate decisions. Participants who begin the task with the lower range of the larger–later payments stated lower discount rates than participants who start with the task containing a wider range. Paying monetary incentives does not influence the detected anchor effect. [ABSTRACT FROM PUBLISHER]

This paper presents a theoretical framework for an assessment and valuation of real estate assets and funds, based on modern stochastic discounted cash flow (DCF) models, which accurately captures the nature of related risks. We show that an accurate risk-adjusted valuation is particularly difficult for real estate investments, due to practical limits to diversification and difficulties in approximating total risk with systematic risk. We develop a risk assessment framework that includes idiosyncratic risk but focuses on insolvency risk related to a specific cash flow profile. We also present a methodology of rating this risk, using forecasts and simulations. We conclude that simulation techniques are a valuable tool in property risk assessment. Further, we show that cost of capital and value of assets depend on diversification of specific risks, investors can achieve in their portfolios. [ABSTRACT FROM AUTHOR]

The practice of assigning a lesser value to benefits the further they are into the future, or, in economic terms, discounting, has long played a significant role in shaping public policy. Recently, due to the growing influence of economic modes of thinking on the educational realm, the concept of discounting is also starting to have an influence on the way in which the future is dealt with in educational policymaking. While in other fields, such as health and environmental protection, much has been written about discounting and its far-reaching policy implications, little attention has been given to the subject in the educational domain. The purpose of this article is to discuss critically the role that discounting should play in the educational realm. The article provides a normative stance on the issue by examining the various justifications for discounting and assessing them in light of education’s special characteristics. It concludes that in education we should not rely on a single discount rate, and that certain educational benefits should either not be discounted at all or discounted using a very low rate. [ABSTRACT FROM PUBLISHER]

Research in multiple internal rate of return (MROR) has mainly focused on three areas: uniqueness, conditions where MROR occur, and solutions to MROR. In an attempt to solve for MROR, researchers have assumed that the occurrence of MROR is prevalent and thus a solution is direly needed. This article examines the probability that positive MROR would occur when variation is incorporated into the cash flow and the probability of getting positive MROR when multiple sign-change cash flow is generated. Results show that the probability of positive MROR occurring in multiple sign-change cash flows is relatively low and potentially a rare event. [ABSTRACT FROM PUBLISHER]

In the design of a wastewater treatment plant, engineers must estimate the future population that the plant will need to serve. When the population growth is uncertain, modular design can reduce up-front capital costs, operating costs and total expected present value costs. Models based on real option theory can provide insights to engineers/decision-makers that will not arise from standard net present value analysis. We consider a municipality faced with a plant expansion decision required to meet the demand of significant, uncertain growth. We present a model that optimises the size of the plant and its maximum modular size. The optimisation requires that multiple solutions be calculated at the decision time for the staged expansion. We utilise a moment matching technique to approximate the solution of the Asian-like option. The results show that as the uncertainty increases, a modular plant can save significant total costs for the municipality. [ABSTRACT FROM AUTHOR]

This study revisits the issue of accuracy in contemporary hotel valuation. Along with the hotel valuation techniques used by Rushmore (1992) and Chen and Kim (2010), this study uses the cost approach and the automated valuation model (AVM) in its examination of contemporary hotel valuation techniques. Fourteen randomly selected hotel firms are analyzed using nine valuation approaches. The valuation results are then compared to the market values of these firms to assess which technique provides the most robust and supportable estimate. Research results reveal that, at least for the analyzed sample, the discounted cash flow (DCF) technique provides the most realistic estimate of a hotel firm's value. Results also show that the valuation estimate of AVM is significantly different from both Band of Investment methods. As such, the process of valuing hotel properties is better understood. [ABSTRACT FROM AUTHOR]

This article uses real options to value a high-tech company with significant growth option potential. The case of EchoStar Communications Corporation is used as an illustration. The company's growth opportunities are modeled and valued as a portfolio of growth options, namely options to expand its pay television, equipment, and internet services. Expansion of the main business can occur geographically (in the USA, internationally, and through partnerships) or through cross-selling of new products and services to its customer base. The internet business can expand via switching to digital subscriber line and through partnerships. The underlying asset (business) for the expansion options is the ‘base’ discounted cash flow (DCF), after removing the constant growth rate in the terminal-value DCF assumption. The options-based estimate of present value of growth opportunities (PVGO) value substitutes for the terminal growth DCF estimate. We show that our options-based portfolio PVGO provides a better estimate of the firm's growth prospects than the terminal growth DCF assumption. [ABSTRACT FROM AUTHOR]

Due to the requirement to demonstrate financial feasibility of policy proposals and scheme-specific planning obligations, development viability and development appraisal have become core themes in the English planning system. The objective of this paper is to evaluate the application of development appraisal in practice. The paper reviews the literature and the models available to assess the viability of development and analyses a sample 19 development viability appraisals to identify practice. The paper concludes that the practice of development appraisal deviates significantly from the tenets of capital budgeting theory. In particular, in addition to a propensity to oversimplify the timing of income and expenditure, the way in which debt, developer’s return and value and cost change are handled in practice illustrates a major gap between mainstream capital budgeting theory and development appraisal in practice. [ABSTRACT FROM AUTHOR]

We examine the possible errors of various present value approximations that center on the widely used end-of-period convention in cases of intraperiod cash flows. We suggest a new formula for adjusting the end-of-period present value based on the harmonic mean of the end-of-period and beginning-of-period present values. This approximation minimizes the maximum possible error in general. We give useful nomograms for several cash flow patterns to assess and correct for the errors of the different approximation methods. We find that the harmonic approximation has acceptable errors for most of these patterns. The findings are illustrated in a realistic example. [ABSTRACT FROM AUTHOR]

A team from McKinsey (Koller et al. 2010) recommended the value driver formula for continuing value. The idea is as follows: The company is almost in a steady state. However, the existing operations and the subsequent ones, referred to as growth projects, can be somewhat different. That is, the return on new invested capital (RONIC; refers to growth projects) can be lower than the return on invested capital (ROIC; refers to existing operations). Two weaknesses are associated with the McKinsey formula. Firstly, the only permissible case of RONIC < ROIC is where the working capital requirement is different between the growth projects and the existing operations. The usual Gordon formula then gives the same result, so the McKinsey formula is not necessary. Secondly, the implied split into existing operations and growth projects means that the former are valued under the unreasonable assumption of zero inflation. A more significant extended value driver formula is derived that rectifies these weaknesses. [ABSTRACT FROM AUTHOR]

The article examines the role of the functioning of the market when the hypotheses to be tested are established and the discount rates used in the traditional dividend, free cash flow and abnormal earnings models. It explains the Efficient Market Hypothesis (EMH). It also discusses the effect of the discount rates.

Financial models vary according to their ability to shape markets. This ability depends on the way models are used in institutional settings. In contrast to the prevalent view that involvement in organizational practices almost automatically makes models performative, this paper argues that institutional design might obstruct potential model performativity. This crucial issue determines whether models are strongly or only ‘generically’ or ‘effectively’ performative. The empirical study of the usage of the discounted cash flow (DCF) model presented in this paper offers an example of an application practice that significantly limits the model's performative power. [ABSTRACT FROM PUBLISHER]

We are in a subfair casino, with fortune , and we want to turn it into a fortune of size 1 in discounted time. We may stake any amount if our fortune is f at any time, , and at any odds, r>0. We assume that every such gamble has a pay-off with fixed expected value cs, with . The problem is to determine the maximum expected discounted pay-off , , where the maximum is taken over all choices of stakes and odds, S are stakes, and R are odds, and we get a positive pay-off only if our final fortune is 1. We determine the explicit recurrence satisfied by the unique optimal strategy and discounted pay-off. The optimal function is piecewise smooth in intervals , ], , between critical fortunes . [ABSTRACT FROM AUTHOR]

Decision-makers frequently need to develop new strategic plans to correct weaknesses or build new strengths for a changing business condition. Although numerous studies have addressed the economic product quantity problem, most are unable to cope with the defective products identified during processing. While some investigations have considered the cost of defective products, these studies have only considered the two outcomes of acceptance or rejection, and thus fail to accurately reflect the complexity of product quality. Therefore, this study adopts the Taguchi loss function, a kind of quality cost to measure product quality. In addition, many economic product quantity and economic order quantity models cannot accurately predict cost because they ignore the time-value of money, and thus this study employs the time-value of money. Furthermore, this study also considers the exponential process quality improvement function as a method of estimating how investment reduces process variation. As a result, this study considers the quality cost, the time-value of money, and the exponential process quality improvement function in constructing a new total cost model to optimize the production period, and initial investment in process improvement so as to minimize total cost. [ABSTRACT FROM AUTHOR]

Transparent insulation systems (TI-systems) of less than 20cm thick have been developed as an alternative to opaque wall insulation and windows, which provide a financial return to building occupants when applied to building facades. Lack of detailed cost analysis of TI-systems is a major constraint to the application of TI-wall and TI-glazing in buildings. A goal directed life cycle costing (LCC) technique and sensitivity analysis used to evaluate the economic feasibility of TI-applications in office buildings form the basis of this research. It was undertaken as part of research to determine optimum energy and cost performance of TI-systems for external cladding of high-rise and low-rise office buildings in temperate and tropical climates. The LCC of the buildings with conventional facades were compared with those with TI-facades. The results show that LCC can be used to evaluate the economic feasibility of low carbon technologies such as TI-systems effectively. A detailed account is provided of how different sources of cost data can be captured, collected and integrated to perform selective goal directed LCC analysis in the absence of detailed historical LCC data. The use of the goal directed LCC method and cost influence diagram presented in this research can be adopted as a standard method for assessing the economic feasibility of applying low carbon technologies to buildings. [ABSTRACT FROM AUTHOR]

The proportion of sustainable property in the total building stock remains small. One reason is that the financial added value resulting from sustainability is not sufficiently taken into account in property valuation due to the tendency of valuations to lag behind market trends. Quantitative information is provided to integrate those aspects of sustainability relating to value into valuations and thereby contribute to the reduction of valuation lag. The Centre for Corporate Responsibility and Sustainability (CCRS) Economic Sustainability Indicator (ESI) measures the risk of property to lose value and the opportunity to gain value due to future developments (e.g. climate change or rising energy prices). Five groups of value-related sustainability features were identified: flexibility and polyvalence; energy and water dependency; accessibility and mobility; security; and health and comfort. By minimizing the risk of loss in value through future developments, those sustainability features contribute to the property value. Their effects on property value were quantified by risk modelling. As an indicator for future-oriented property risk, the ESI is integrated into the discount rate of discounted cash flow valuations. The approach was tested for plausibility and practicability on more than 200 properties. La proportion de biens immobiliers durables dans le parc immobilier total demeure faible. L'explication tient pour une part au fait que la valeur ajoutee financiere resultant de la durabilite n'est pas suffisamment prise en compte dans l'evaluation des biens immobiliers en raison du fait que les evaluations tendent a avoir du retard sur les tendances du marche. Des informations quantitatives sont fournies afin d'integrer les aspects de la durabilite lies a la valeur dans les evaluations et de contribuer ainsi a la reduction du retard dans les evaluations. L'Indicateur de Durabilite Economique (ESI) du Centre pour la Responsabilite et la Durabilite en Entreprise (CCRS) mesure le risque de perte de valeur des biens immobiliers et la possibilite d'en accroitre la valeur du fait des evolutions futures (par ex. changement climatique et hausse des prix energetiques). Cinq groupes de fonctions de durabilite liees a la valeur ont ete identifies: flexibilite et polyvalence, dependance vis-a-vis de l'energie et de l'eau; accessibilite et mobilite; securite; sante et confort. En minimisant le risque d'une perte de valeur causee par les evolutions futures, ces fonctions de durabilite contribuent a la valeur des biens immobiliers. Leurs effets sur la valeur des biens immobiliers ont ete quantifies par une modelisation des risques. En tant qu'indicateur du risque prospectif pour les biens immobiliers, l'ESI est integre au taux d'actualisation des flux de tresorerie actualises. Cette approche a ete testee quant a sa plausibilite et sa praticabilite sur plus de 200 biens immobiliers. Mots cles: flux de tresorerie actualises, indicateur de durabilite economique, evaluation des biens immobiliers, modele de risque, fonctions de durabilite, durabilite, batiments durables [ABSTRACT FROM AUTHOR]

In this article the concept of an integration model of financial analysis methods of investment projects is presented. The described approach concerns the discounted cash flow methods and is focused on the future value growth of an investment. The defined relationships between these methods make it possible to illustrate the main perspectives of efficiency analysis. The aim of this article is to bring many methods of analysis together in a common framework. [ABSTRACT FROM AUTHOR]

This paper proposes and tests a variant of the standard discounted cash-flow model for enterprise valuation. The cash-flow (C/F) stream to be discounted is projected as the product of the sales and the free C/F to the enterprise (FCFE)-to-sales ratio and their respective rates of change. The C/F timespan is divided into three intervals. In the first, sales and ratio change according to the company's track record. On the assumption that both industry and firm abnormal earnings disappear at a certain point, marking the beginning of the third interval, the ratio evolves over the second interval to reach the Industry's average and thereafter remains constant. On the same basis, sales grow in the third interval in accordance with the economy's long-term trend, i.e. at the long-term nominal GDP growth rate, and within the second at an average of the latter and the track-record year-on-year growth rate. The proposed variant is tested for the four largest telecommunications companies in continental Europe over a 2.5-year period. The results, together with those of the standard model, are then compared with enterprise market values to test relative performance. Examination of their respective bias (signed valuation errors) and inaccuracy (ditto unsigned) seems to indicate that the proposed variant outperforms the standard model from which it is derived, even for different assumptions about the valuation horizon and for alternative ways to estimate the values of the variables. [ABSTRACT FROM AUTHOR]

An individual’s willingness to accumulate retirement wealth is influenced by their preference for intertemporal consumption. People with a strong preference for current consumption (high personal discount rate) may choose to save less and face the risk of decreased retirement preparedness. A negative relation between a high personal discount rate and retirement wealth may be reduced when individuals engage in some form of retirement planning. Using the National Longitudinal Survey of Youth, we provide evidence that respondents with a high personal discount rate accumulated 37% less retirement wealth, on average, between 2004 and 2008, when compared with respondents with a low personal discount rate. However, when retirement planning strategies were included in the model, there was no statistical difference in retirement wealth between people with high and low personal discount rates. The retirement planning strategies included calculating a retirement income need, hiring a financial planner for retirement or engaging in both of these activities. [ABSTRACT FROM PUBLISHER]

Entities reporting under IFRSs are required to determine a value in use in accordance with IAS 36: Impairment of Assets. The value in use is the present value of the expected future cash flows. Appendix A to the standard gives guidance on how to apply the DCF calculus in the context of IAS 36. In order to determine a suitable discount rate, the reporting entity is given the choice between three alternative starting points. The requirements of IAS 36 are, in this respect, quite different from the accounting requirements of US GAAP. In this paper we analyse these starting points and demonstrate the functional interrelation between them. Given that the interrelation is complex even under simple assumptions, we will provide guidance to practitioners as to which starting point should be used. We will demonstrate that the weighted average cost of capital (WACC) is the only suitable starting point. Based on this analysis, we also show that the other alternative starting points are not sufficiently clear. When used in practice, the guidance may even give rise to substantial measurement errors and make earnings management possible. Thus, our recommendation to the IASB is to shorten the guidance and delete the other two starting points. [ABSTRACT FROM AUTHOR]

A major concern of policymakers and researchers in China is finding an appropriate size of the gross fixed capital investments for water conservancy (GFCIWC). This paper determines the optimal proportion of GFCIWC to GDP. Unlike engineering economics, we investigate the benefits of GFCIWC at a macro-economic level, using the 1999 input-output table extended for water conservancy. Different kinds of impacts are induced by GFCIWC. These include forward benefits (flood control, water supply, irrigation, hydroelectric power, soil and water conservation, environmental protection) and backward benefits for GDP; negative social effects; and opportunity costs of GFCIWC. The results are put into a set of regression equations between total benefits of GFCIWC and the proportion of GFCIWC to GDP, from which the optimal proportion - or a desirable range - can be determined. The results may provide policymakers with guidelines for allocating investments. [ABSTRACT FROM AUTHOR]

This paper analyses the issue of the timing of expenditures in replacing fixed assets within the context of valuing firms using the free cash flow approach. Standard practice amongst both practitioners and academics is to assume a smooth pattern in these expenditures past some future point, and such a pattern is improbable. This paper develops a model that rests upon much less restrictive assumptions, shows that the model is readily amenable to implementation, and that the difference in valuation results could be quite substantial. [ABSTRACT FROM AUTHOR]

The article surveys contributions to the literature covering the field of probabilistic discounted cash flow (DCF) analysis of individual capital investments from the earliest contributions of the 1960s to today. Such analysis includes the methods of present worth (net present value), annual worth, future worth, internal rate of return, payback period, and benefit:cost ratio. The history and development of the probabilistic case is traced, listing the main assumptions made and any restrictions to applications. The survey will be found useful by those engaged in risk management and decisions associated with investments and budgeting having uncertain outcomes. [ABSTRACT FROM AUTHOR]