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An economic feasibility study must consider the uncertainties inherent to a mining project, whose risks must be quantified properly to enable accurate decisionmaking. Studies previously carried out through the Discounted Cash Flow (DCF) methodology in the project evaluated here - a quarry whose operations are currently interrupted, located in Pernambuco, Brazil, formerly taxed under the presumed profit regime - indicated a positive Net Present Value (NPV) in the deterministic scenario, therefore projecting a profitable project. However, a probabilistic analysis using Monte Carlo simulations indicated only a 49.98% occurrence probability for this NPV. An assessment focused on the company's taxation was never carried out, which is a gap that the present study intends to fill, in addition to evaluating the feasibility of immediate investment in this project. Furthermore, this is a gap in Brazilian literature in general, which does not take into account the taxation system in their economic assessments. In this context, considering scenarios whose taxation was based on real and presumed profit regimes, we reassessed the cash flows of this quarry and performed deterministic and probabilistic economic analyses, and compared the results of both scenarios. The sensitivity analysis indicated that the production rate would be the most impactful variable in the project's NPV, considering the six variables assessed. Hence, it was verified in both deterministic and probabilistic analyses that taxation under real profit, results in a higher economic return with a 56.08% probability of the NPV being positive and with the Internal Rate of Return (IRR) higher than inflation (SELIC rate) at 4.81%; the taxation under the presumed profit, on the other hand, obtained respective probabilities of 46.54% and 3.23%. However, with the chances of obtaining some profit (NPV greater than zero) at the order of 50% and a minimal chance of the IRR being greater than the SELIC rate adopted at the time of this study, we would advise against investing in this venture. Moreover, even if the current moment is not the most suitable for investment in this sector, regardless of the production rate assessed in the probabilistic analysis, taxation on the real profit regime presented a greater economic return than taxation on the presumed profit regime., indicating that, for the parameters considered in this study, the first would be the most appropriate choice of tax system for this type of enterprise in Brazil. [ABSTRACT FROM AUTHOR]

This case guides students through the process of preparing a real-life business case. The business case involves capital expenditure analysis for a potential project in the Wally-Mart Supermarkets frozen supply chain. There are three parts to the business case: (1) prepare a financial model in Excel with a discounted cash flow method to analyze relevant incremental capital expenditures, revenues, costs, and profits; (2) concisely communicate the financial model and business case in a business style Word report; and (3) concisely communicate the financial model and business case in a business style PowerPoint presentation. The case materials include a practice financial modeling exercise. The case is suitable for use in undergraduate and graduate management accounting courses. [ABSTRACT FROM AUTHOR]

The study aims to explore the role of the real options practices to an appraisal of capital investment decisions. We deployed the Binary logistic regression technique to test the hypotheses of the study. For the binary model, two equations were developed having two dependent variables, first the use of real options, and the second the real options familiarity. The independent variables of the study were the annual capital budget, Capex time, Net profit margin, and R&D. The finding showed listed companies relied on discounted cash flow techniques (DCF). A very few were practising real options only for supplement and to support results from other methods. The real options require too much sophistication and lack of top management support is the major reason for not using real options. The use of real options having a significant relation to the Annual Capital Budget, Net Profit Margin, and R & D, Capex time. Real options Familiarity having a significant relationship with Net Profit Margin and R & D and insignificant with Annual Capital Budget. DCF method is rigid and cannot incorporate the uncertain future and upcoming opportunities. Corporate and academia are suggested to concentrate on real options practised to make the right decision for the corporate, industry, and country progress. [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]

• The general problem of developing profitability optima is considered at the conceptual level for chemical process designs. • Industrial estimates often employ IRR (Internal Rate of Return) to measure profitability, with a "traditional" hurdle rate to specify the required IRR (ROI). • The NPV % measure provides a more effective basis. Its parameters are adjustable to match the process, the financial environment, and profitability requirements. • Viewing long-term profitability (NPV project), short-term risk [(NPV %)−1] and total capital invested (TI), the first should be maximized ... the last two, minimized or at least subject to bounds. • A new graphical method, with NPV % plotted versus NPV project , couples the three objectives, thus avoiding a Pareto-style optimization with its arbitrary weightings. • The optimum design is at the point of diminishing returns for LT profitability. Any lower value of TI reduces max (NPV project); any larger value isn't fully recovered. Recent fundamental work with discounted cash flow methods shows that an alternative metric for evaluating profitability and risk, one different from Internal Rate of Return (IRR) —namely the annualized and non-dimensionalized Net Present Value (NPV %)— can make evaluating project profitability easier yet more informative. It provides a simple and transparent strategy to optimize a design's key financial dependent variables (capital investment, profitability, risk). 1 1 Model form was originally referred to as "inside-out," but is now called "exo-parametric," i.e., switching from the vernacular to a more scientific and widely-used terminology (Mellichamp, 2018). Both traditional and exo-parametric modeling methods developed by the author are linked to this metric, providing an efficient and precise mechanism to organize and carry out the financial/optimization search procedures in process design. Design engineers want to know what is the optimum size of investment (TI) that meets projected market conditions? What is the expected long-term (NPV) return? What metric can be used to maximize them, consistent with the need to recover capital as quickly as reasonably possible (i.e., to bound the "short-term risk")? The proposed approach answers all three questions simultaneously, with a precise min-max solution obtained transparently. [ABSTRACT FROM AUTHOR]

Prior scholarship points to valuation disputes and valuation error as key drivers of Chapter 11 outcomes. Avoiding valuation disputes and errors is also the underlying driver of most proposed reforms, from Baird's auctions to Bebchuk's options. In this paper, we undertake a detailed examination of bankruptcy court opinions involving valuation disputes. Our paper has two goals. The first is to understand how parties and their expert witnesses justify their opposing views to judges, and how judges decide between them. The second is to provide practical guidance to judges in resolving valuation disputes. We document surprisingly pervasive (and often selfserving) errors in expert testimony. This is particularly true when valuation experts apply the discounted cash flow (DCF) method. With respect to key elements of that method, such as the discount rate, we observe stark inconsistency between expert testimony and finance theory and evidence. We propose simple strategies based in finance theory that judges can employ (such as avoiding the use of company-specific risk premia in discount rates) to reduce the scope for valuation disagreements in Chapter 11. We also recommend that judges rely on the peer-reviewed finance and economics literature to assess the scientific reliability of discount rates. [ABSTRACT FROM AUTHOR]

The literature ON capital budgeting has not generally reserved a specific role for the rate of price inflation in the analysis of capital investments. In the taxless world of most textbook discussions of the subject, inflation would presumably only augment both future cash flows and discount rates by comparable amounts, thus having no effect on present value calculations. Under the U.S. tax code, however, after-tax present values are not neutral with respect to different rates of inflation, because depreciation charges are based on historical costs. This complication may have been of little practical importance during much of the post-war period, but rates of inflation such as those experienced in recent years will generally be a material factor in present value calculations. In order to focus on the role of the tax effects of inflation in the capital budgeting decisions of the firm it is necessary to hold constant both real pretax cash flows associated with alternative investment projects (including capital costs) and real discount rates. The question of whether real pretax cash flows and real discount rates are in fact systematically related to the rate of inflation is essentially an empirical one and goes beyond the scope of the present paper. Some evidence to the contrary in the case of cash flows is given by Kessel and Alchain [5]. The hypothesis that real discount rates are unrelated to the rate of inflation, of course, goes back to Fisher [3, 4] and enjoys support from a large body of empirical literature. The analysis presented here does not distinguish between actual and expected future rates of inflation or cash flows. Whether the reader wishes to regard the discussion as an analysis under perfect certainty or prefers to interpret future magnitudes as certainty equivalents accompanied by appropriate discount rates is immaterial for present purposes. The paper is organized around five propositions dealing with the impact of inflation, ceteris pari... [ABSTRACT FROM AUTHOR]

Contentions that American managers are too myopic are, in a word, wrong. While some managers very probably behave as if only tomorrow matters, the preponderance of evidence shows this to be untrue. Data on real investment activity, start-up financing, and the competitive position of the U.S. in high value-added products all confirm that U.S. managements are collectively not short-sighted. [ABSTRACT FROM AUTHOR]

We use accounting identities to decompose unexpected changes in investment growth into surprises to current cash-flow growth and stock returns, and revisions of expectations about future cash-flow growth and future discount rates. Using a vector autoregressive model we find that current cash-flow surprises account for the largest element of the variance decomposition. Investment growth and current cash-flow surprises are negatively correlated with news about future cash-flow growth, which can be expected from persistent productivity shocks and decreasing returns to scale. We find little evidence of a discount rate channel for investment since return terms are small and have unintuitive signs. [ABSTRACT FROM AUTHOR]

In this paper we discuss the impact of inflation with power demand pattern where two parameters Weibull distribution for deterioration is considered and also a discounted-cash-flow (DCF) approach with progressive trade credit is adopted. We present an analytic formulation of the inventory problem and compare the three cases. The objective function to be optimized is considered as present value of all future cash-out-flows. The motivations, extensions and weaknesses of various previous models have been discussed in brief to bring pertinent information regarding model developments in the past two decades. Numerical example is presented to illustrate the model developed. The result shows that in case 1 and case 2, we observ that when inflation rate increases, optimum cycle time, optimum procurement quantity and present value of total inventory cost per cycle time decrease and in case 3 when inflation rate increases the present value of total inventory cost per cycle also increases. [ABSTRACT FROM AUTHOR]

Discounted cash flow techniques are insufficient to assess the diversity of options that can be associated with the leases. For this reason, the explicit evaluation of these options is critical to complete an analysis of the lease. The main objective of this paper is to determine the value of the option to renew the lease by the lessee and its effect on the rent under the assumption that the acceptable maximum annual rent for the lessee is the net cash flow generated by the company. [ABSTRACT FROM AUTHOR]

This article presents a detailed anatomy of the nearly sevenfold run-up in the price of Tesla stock between March 22, 2013 and February 26, 2014, and attempts to determine the role played by investor sentiment. Tesla offers a unique opportunity in this context because the run-up was on the order of magnitude experienced by some of the most volatile technology stocks, but Tesla operates in an industry--automotive manufacturing--and a potential industry--battery construction--that are mature and populated by established competitors. This makes it possible to construct discounted cash flow valuation models that are anchored to established fundamentals. On the basis of these models, in conjunction with a detailed event study and analysis of institutional stock holdings and short-sales data, the authors conclude that the run-up cannot be explained as a rational reaction to fundamental information. Instead, they conclude that, at the end of the run-up, the stock was overvalued by approximately 150%. In their view, the case study provides support for the assertion by Lawrence Summers that price and rational value can diverge significantly for prolonged periods of time. [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]

Abstract: By far, the most widely used enterprise valuation method in business practice is the discounted cash-flow method. Thus, the residual value or continuing value accounts for a significant percentage of the enterprise’s value and will depend on the length of the time horizon. In 2006, Jennergren developed a continuing value model based on one of the methods most commonly used for calculating this value, the Gordon model. The Jennergren model extends the analysis of this model and aims to have it implemented more strictly, taking into account two main parameters, capital expenditures and tax savings due to the depreciation of productive assets. In this study the Jennergren model has been applied to small and medium-sized Spanish enterprises with turnover ranging from 2 to 50 million euros over the period 2005–2008. These enterprises have also been differentiated by industry, using the Spanish NCAE classification (National Classification of Economic Activities). The information used was taken from the SABI (Iberian Balance Sheet Analysis System) database. The resulting economic lives of the productive assets of each industry were compared to the useful lives shown in the Spanish Corporation Tax Law Amortisation and Depreciation tables. It was found that most estimates are within the range established by law. In those cases where this assumption is not met, it is usually due to accelerated depreciation over the limits strictly permitted under law. [Copyright &y& Elsevier]

We formulate a generalized constant growth valuation model incorporating inflation and capital maintenance. We find that in general there are two sources of growth: growth due to capital maintenance and growth due to net new investments. The generalized version of the constant growth model allows the reconciliation of the existing literature, particularly the works of Gordon and Shapiro (1956), Lally (1988), and Bradley and Jarrell (2008), which all employ particular definitions of capital maintenance. Evaluating the practical relevance of either model we find that each model is best suited for a very particular company set-up, which does not necessarily correspond to the commonly observed business models. The generalized version of the constant growth valuation model, however, presents a flexible approach that is capable of capturing various conceptions of capital maintenance. [ABSTRACT FROM AUTHOR]

The article presents an analysis of a discounted cash flow (DCF) method which can assess percent good factors for secondhand equipment and machines. It says that the selection process is based on the salvage value of items, income taxes, and income obtainable through the equipment's usage. It explores the benefits of using the suggested DCF method for the valuation of secondhand items.

Companies can supplement their traditional capital budgeting techniques with a strategic analysis that helps align both short- and long-term goals. In fact, a strategic analysis of this kind may be the only technique applicable for decisions in which cash inflows are difficult to estimate. Because a strictly financial analysis may lead to different decisions than a strategic analysis, managers need to develop appropriate review criteria that can take into account both strategic and financial analyses, when appropriate. © 2011 Wiley Periodicals, Inc. [ABSTRACT FROM AUTHOR]

In this paper, we evaluate alternative price multiples for equity valuation purposes in the Indian context. Data are taken from 145 large companies that satisfy our screening criteria. The sample companies cover 13 prominent sectors, and the study period covers the years 1990-2007. We generate price forecasts based on each multiple by regressing the historical prices on different value drivers. We use two forecast evaluation criteria, namely root mean squared error and Theil's inequality coefficient. We find that price-to-earnings provide the best price forecast compared to the other three price multiples, price-to-book value, price to cash flow and price to sales. We also develop price forecasts based on pairwise combinations of these price multiples. The value driver combination book value-sales appears to be most efficient in terms of error minimisation. However, historical price to earnings as a standalone multiple performs better in equity valuation vis à vis all combinations of value drivers. We recommend that historical price to earnings (P/E) is the best price multiple for developing price forecasts in the Indian environment. Our findings are pertinent for market participants and financial regulators. The present work contributes to emerging market literature on equity valuation. [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]

Copyright of Transformations in Business & Economics is the property of Vilnius University and its content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder's express written permission. However, users may print, download, or email articles for individual use. This abstract may be abridged. No warranty is given about the accuracy of the copy. Users should refer to the original published version of the material for the full abstract. (Copyright applies to all Abstracts.)

The productive sector of the economy, represented by a single firm employing labor to produce the consumption good, is studied in a stochastic continuous time model on a finite time interval. The firm must choose the optimal level of employment and capital investment in order to maximize its expected total profits. In this stochastic control problem the firm's capacity is modeled as an Itô process controlled by a monotone process, possibly singular, that represents the cumulative real investment. It is optimal to invest when the shadow value of installed capital exceeds the capital's replacement cost; this threshold is the free boundary of a related optimal stopping problem which we recast as a stopping problem without integral cost, similar to the American option problem. Then, under a regularity condition, we characterize the free boundary as the unique solution of a nonlinear integral equation. [ABSTRACT FROM AUTHOR]

Para incorporar flexibilidad en la evaluación de proyectos de inversión existen hoy en día dos principales metodologías de evaluación que son el descuento de flujo dinámico y las opciones reales. Al analizar estas metodologías se determinó que los métodos tradicionales no incorporan flexibilidad. A excepción del descuento de flujo dinámico, que aunque trabaja con los mismos supuestos de lo demás incorpora la flexibilidad al trabajar con escenarios, el problema aquí es que esos escenarios permanecen estáticos durante el periodo de evaluación, pudiendo llevar a decisiones equivocadas al subvalorar los proyectos de inversión. En el caso del análisis de opciones reales esta metodología sí incorpora la flexibilidad en la evaluación, por lo que sería la más adecuada de utilizar en el caso de tener que trabajar en entornos con alta incertidumbre. En la actualidad se le reconoce a este método su aporte al pensamiento estratégico ya que cuando se utiliza esta metodología lo primero es determinar las opciones del proyecto para luego valorarlas, por lo que una equivocada determinación de las opciones llevará a una mala valoración. [ABSTRACT FROM AUTHOR]

Different valuation methods can lead to different corporate investment decisions, and the conventional “static, single discount rate” DCF approach in particular is biased against many of the kinds of decisions that corporate managers tend to view as “strategic.” Reducing the bias from valuations involves two main tasks: treating risk in a way that is consistent with observed market pricing, and accounting for the ability of companies to make decisions “dynamically” over time. The authors propose two separate tools, market-based valuation and complete decision tree analysis, for accomplishing these two improvements in valuation. The authors also suggest working with the full distribution of future cash flows, one possible realization at a time, rather than working with the aggregate measure of expected cash flow. From a technical perspective, it is necessary to work with the full distribution to value real options properly. Valuing the cash flows one realization at a time also leads to a much better understanding of the interaction between economy-level, systematic risks and local asset-level, technical risks. Just as important, the proposed approaches support an effective division of labor between local asset managers, who are better positioned to model technical considerations and other asset specifics, and the central finance staff, who can ensure the consistent treatment of economy-wide risk and to create the rules of engagement for evaluating opportunities. After presenting an overview of both the valuation and the organizational issues, the authors present a case involving a corporate investment in carbon capture and storage that illustrates both the application of the proposed methods and the various sources of bias in the typical DCF analysis. [ABSTRACT FROM AUTHOR]

Discounted cash flow, method of comparables, and fundamental analysis typically yield discrepant valuation estimates. Moreover, the valuation estimates typically disagree with market price. Can one form a superior valuation estimate by averaging over the individual estimates, including market price? This article suggests a Bayesian framework for combining two or more estimates into a superior valuation estimate. The framework justifies the common practice of averaging over several estimates to arrive at a final point estimate. [ABSTRACT FROM AUTHOR]

This study empirically examines capital budgeting methods. Based on 115 responses from a cross-sectional survey and two approaches to contingency fit, this study produces three basic findings. First, both discounted cash flow (DCF) techniques and nonfinancial measures are widely used in capital budgeting. However, DCF techniques are more important than nonfinancial measures, and nonfinancial measures appear to serve as a partial substitute when DCF analysis is less efficient. Second, DCF techniques and nonfinancial measures are not unconditionally appropriate. Although the impact of firm strategy on capital budgeting methods is not supported by the present results, the study shows that product standardization affects both capital budgeting methods, as hypothesized. Firms with high product standardization tend to place more emphasis on DCF analysis, while firms with low standardization are more likely to focus on nonfinancial measures. Third, an appropriate fit under contingency theory between product standardization and the two capital budgeting methods is significantly associated with a firm's satisfaction with the capital budgeting process. [ABSTRACT FROM AUTHOR]

We extend Dopuch et al. (2003) by examining the effect of various fee ratios on investor perception of auditor independence and market behavior. Consistent with Dopuch et al. (2003), we find disclosure of nonaudit fees reduces the accuracy of investor perception of auditor independence. More importantly, we document that the proportionate level of nonaudit fees to total fees has a varying impact on investor perception of auditor independence and market behavior. In particular, there appears to be a nonlinear effect between investor perception of auditor independence and market behavior. In summary, when investors perceive auditor independence is impaired as a result of the level of nonaudit fees, more asset pricing inefficiencies occur in these experimental markets. [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]

This paper develops empirical proxy measures of information technology (IT) risk and incorporates them into the usual empirical models for analyzing IT returns: production function and market value specifications. The results suggest that IT capital investments make a substantially larger contribution to overall firm risk than non-IT capital investments. Further, firms with higher IT risk have a higher marginal product of IT relative to firms with low IT risk. In the market value specification, the impact of IT risk is positive and significant, and inclusion of the IT risk term substantially reduces the coefficient on IT capital. We estimate that about 30% of the gross return on IT investment corresponds to the risk premium associated with IT risk. Taken together, our results show that IT risk provides part of the explanation for the unusually high valuations of IT capital investment in recent research. [ABSTRACT FROM AUTHOR]

The article provides information on the basic elements of the valuation models that have been reversed-engineered to obtain estimates the cost of capital. The author states that the residual income valuation model can be derived from the discounted cash flow valuation model. Meanwhile, the residual operating income valuation model can be reverse-engineered to determine the expected rate of return.

The article reports on the proper application of real options (RO) in various businesses. It briefly argues that RO is an important extension of discounted cash flow analysis, and is critical to aligning the words and the spreadsheets of financial analysts. It focuses on the minimum level of detail that will allow you to use RO to reach easy-to-communicate quantitative results.

A 'two-stage growth' discounted cash flow (DCF) model is built to test whether changes in the underlying market fundamentals help to explain movements in stock prices. Empirical results on two samples of US and EU stocks show that the 'fundamental' earning price ratio (E/P) explains a significant share of cross-sectional variation of the observed E/P, this impact being stronger in the US market. It is also found that: (i) the fundamental component of the E/P has superior explanatory power than simpler measures of expected earnings growth; (ii) 'non-fundamental' components, interpreted as signals reducing asymmetric information (such as firm size, the number of forecasts and the chartist momentum), mitigate the role of the fundamentals; (iii) current deviations from the fundamentals are affected by ex post adjustment of publicly available information in the EU sample. It is argued that differences in regulatory environments and in the composition of investors between the US and EU financial systems may help to explain these comparative findings. Results appear consistent with the 'market integrity hypothesis' postulating that reliance on publicly observable fundamentals is higher when insider trading is lower. [ABSTRACT FROM AUTHOR]

This study applies the discounted cash flow (DCF) approach for the analysis of a replenishment problem over a finite planning horizon. Thus, a deterministic economic order quantity (EOQ) inventory model taking into account inflation and time value of money is developed for deteriorating items with price- and stock-dependent selling rates. An efficient solution procedure is presented to determine the optimal number of replenishment, the cycle time and selling price. Then the optimal order quantity and the total present value of profits are obtained. Numerical examples are presented to illustrate the proposed model and particular cases of the model are also discussed. [ABSTRACT FROM AUTHOR]

Most discussions of capital budgeting take for granted that discounted cash flow (DCF) and real options valuation (ROV) are very different methods that are meant to be applied in different circumstances. Such discussions also typically assume that DCF is “easy” and ROV is “hard”—or at least dauntingly unfamiliar—and that, mainly for this reason, managers often use DCF and rarely ROV. This paper argues that all three assumptions are wrong or at least seriously misleading. DCF and ROV both assign a present value to risky future cash flows. DCF entails discounting expected future cash flows at the expected return on an asset of comparable risk. ROV uses “risk-neutral” valuation, which means computing expected cash flows based on “risk-neutral” probabilities and discounting these flows at the risk-free rate. Using a series of single-period examples, the author demonstrates that both methods, when done correctly, should provide the same answer. Moreover, in most ROV applications—those where there is no forward price or “replicating portfolio” of traded assets—a “preliminary” DCF valuation is required to perform the risk-neutral valuation. So why use ROV at all? In cases where project risk and the discount rates are expected to change over time, the risk-neutral ROV approach will be easier to implement than DCF (since adjusting cash flow probabilities is more straightforward than adjusting discount rates). The author uses multi-period examples to illustrate further both the simplicity of ROV and the strong assumptions required for a typical DCF valuation. But the simplicity that results from discounting with risk-free rates is not the only benefit of using ROV instead of—or together with—traditional DCF. The use of formal ROV techniques may also encourage managers to think more broadly about the flexibility that is (or can be) built into future business decisions, and thus to choose from a different set of possible investments. To the extent that managers who use ROV have effectively adopted a different business model, there is a real and important difference between the two valuation techniques. Consistent with this possibility, much of the evidence from both surveys and academic studies of managerial behavior and market pricing suggests that managers and investors implicitly take account of real options when making investment decisions. [ABSTRACT FROM AUTHOR]

Purpose ? This paper sets out to look at ?calculation of worth? as it relates to valuations. Design/methodology/approach ? A number of pricing models and valuation methods are analysed. Forecasting is also considered. Findings ? It is possible to adapt the discounted cash flow (DCF) method to incorporate subjective predicted growth rates. In the case of a rack-rented freehold, the DCF method produces the same value as the traditional method. Originality/value ? This paper looks at ?testing the assumptions?. [ABSTRACT FROM AUTHOR]

The article presents a response to the forum, initiated by the author, on teaching discounted cash flow (DCF) in business schools. The author praises his critics and explains his reasons for choosing to remove DCF from the accounting curriculum. The author reiterates his point about the excessive size of the accounting curriculum. Comments on each of the articles published in the forum are included, with special praise for professors Simga-Mugan and Paisey. The article concludes that it is more important to work decisively to cut programs without a useful educational purpose than to debate how to cut items from the curriculum.

The article argues that discounted cash flow (DCF) should be removed from the accounting curriculum as it is increasingly irrelevant to contemporary business practice and can be dangerous to corporate accounting. DCF can be used accurately from the position of hindsight, but it is little help in predicting the future course of business. The author argues that a "gut feeling" can be put to better use than strict mathematical models of potential profits in deciding to pursue a new venture. Given the vast amount of material that must be covered in an accounting education, DCF should be replaced in the curriculum by a less restrictive and more optimistic topic.