P24 - Lecture notes 24 PDF

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Summary

An introduction to business strategy, principles and practices required for business success in the competitive market place. Students are exposed to key management theories, models and tools including competitive strategy, finance, planning, new product development, marketing, leadership and others...

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Discounted Cash Flows (DCF) ● DCF analysis is backbone of modern financial analysis ● DCF is used to evaluate project-related cash flow streams whose costs and/or benefits extend over multiple years ● A method to value a project, company or asset ● Used all the time in real estate, banking and corporate finance Time Value of Money ● Income today is real ● Income received in the future is worth less than the same income received now ● Why?: -Risk -Inflation -Uncertainty -Missed opportunity to take, invest and earn interest -Opportunity Cost: Could have invested in alternative projects DCF Concept and Steps ● Concept: valuation method used to estimate attractiveness of an investment opportunity ● DCF analysis uses future cash flow projections & discounts them to arrive at a present value estimate which is used to evaluate potential for investment ● Steps: 1. Estimate the relevant cash flows 2. Calculate the rate of return for the investment 3. Compare the returns to your acceptance criterion Key Informational Needs (info you need): *Use a financial calculator app like Ez Calculators ● n = number of periods (time) ● i = interest rate ● PV = present cash flows ● PMT = annuity stream of cash flows ● FV = future cash flow DCF Concept: Present Value ● Present Value: current worth of a future sum of money or stream of cash flows given a specified rate of return ● To compute the PV of money you’ll receive some years from now, a discount rate is applied: PV = FV/(1+i)n ●

Future cash flows are discounted at the discount rate: -Reflects time value of money, risk or uncertainty of future cash flows -More uncertainty of cash flows: higher discount rate & lower PV = future cash flows DCF Concept: Future Value ● Future Value: value of an asset or cash at a specified date in the future that’s equivalent in value to a specified sum today ● Most common application is compounding: -Future Value of money you have today at an interest rate...