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Unformatted text preview: g and outgoing, is the net present value (NPV), which is taken as the value or price of the cash flows in question. In simple terms, discounted cash flow tries to work out the value of a company today, based on projections of how much money it's going to make in the future. The second, relative valuation, estimates the value of an asset by looking at the pricing of 'comparable' assets relative to a common variable such as earnings, cash flows, book value or sales. A prospective house buyer decides how much to pay for a house by looking at the prices paid for similar houses in the neighborhood. 19
19 Valuation Approaches Contingent Claim Valuations (CCV) is a valuation technique to recognize the value of assets whose cash flows are contingent on a future event occurring. Typical examples would be the development of a pharmaceutical drug, an unknown oil field, or the development of a new product with huge risk and uncertainty.
As a simple example, consider an undeveloped oil reserve belonging to Exxon. You could value this reserve based upon expectations of oil prices in the future, but this estimate would miss the two nonexclusive facts.
1. The oil company will develop this reserve if oil prices go up and will not if oil prices decline.
2. The oil company will develop this reserve if development costs go down because of technological improvement and will not if development costs remain high.
An option pricing mod...
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