TMP 120 Lecture 8 DCF Posting 021218B.ppt - Discounted Cash Flows Finding Value Choosing Between Investment Options Dr Karen Smith Bogart Today Capital

TMP 120 Lecture 8 DCF Posting 021218B.ppt - Discounted Cash...

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Discounted Cash Flows: Finding Value…… Choosing Between Investment Options February 12, 2018 Dr. Karen Smith Bogart
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Today Capital Budgeting DCF Assessing Value: 3 Approaches Blood Analyzer Homework Assignment
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Capital Budgeting The future of a company lies in the investments it makes today. Choices…. Investment project proposals are the responsibility of all managers in the organization. Capital budgeting is the financial evaluation of project proposals. Weigh $$$ outlay (investment) today vs. expected future benefits.
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Discounted Cash Flows Approach to decision-making: Discounted cash flow (DCF) analysis is the 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.
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Discounted Cash Flows Would you rather have $200 today or $200 in one year? Assume there is no trick…. Why? Advantages? Risks?
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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
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Discount (RISK) Rate The discount rate reflects the risk associated with the cash flows. Many investors would rather have their cash now. Investors want to be compensated for the delay. A “risk premium” is added which reflects the extra return investors demand due to their risk. Impact of risk: When the discount rate goes up: the present value goes down. When the discount rate goes down: the present value goes up. Predicting the future is risky… Most discount rates include a “risk premium” Higher the project risk, the higher the discount rate should be Start-up biotechs: 30-40% Expansion project for established company: 5-15% Discount
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DCF Concept and Steps Concept : A valuation method used to estimate the attractiveness of an investment opportunity. DCF analysis uses future cash flow projections and discounts them to arrive at a present value estimate which is used to evaluate the 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.
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Key Informational Needs Information you need: n = number of periods (time ) i = interest rate PV = present cash flows PMT = annuity stream of cash flows FV = future cash flow ****For ease, use a financial calculator phone app (e.g. Ez Calculators)!
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DCF Concept: Present Value Present Value : The current worth of a future sum of money or stream of cash flows given a specified rate of return.
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