Fin. Management 7 - Valuation & Discounted CashFlow

Fin. Management 7 - Valuation & Discounted CashFlow -...

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Hult International Business School - Shanghai Financial Management April/May 2015 Handout 7 – Valuation & Discounted CashFlow
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1-2 7-2 Capital Budgeting The future of a company lies in the investments it makes today. Investment project proposals are the responsibility of all managers in the organization. Capital budgeting is the financial evaluation of project proposals. Weigh outlay today vs. expected future benefits
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1-3 7-3 DCF Discounted cash flow analysis is the backbone of modern academic finance. DCF is used to evaluate cash flow streams whose costs and/or benefits extend beyond the current year.
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1-4 7-4 Figures of Merit Three-step procedure: 1. Estimate the relevant cash flows. 2. Calculate a figure of merit for the investment, summarizing the investment’s economic worth. 3. Compare the figure of merit to an acceptance criterion.
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1-5 7-5 Estimating Cash Flows The first step is challenging. Doing it well requires a thorough understanding of the company’s markets, competitive position, and long-run intentions. Potential estimation difficulties relate depreciation, financing costs, working capital investments, shared resources, excess capacity, and contingent opportunities.
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1-6 7-6 TABLE 7.1 Cash Flows for Container- Loading Pier ($ millions)
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