Iv.

Cash flow valuation techniques

valuation methods

CASH FLOW
 the net cash and cash equivalents transferred in and out of a company.
 Cash received = inflows; cash spent = outflows.
 A company's cash flow can be categorized as:
1) Cash flows from operations,
2) Cash flows from investing, and
3) Cash flows from financing

CASH FLOW VALUATION

 a method used to determine the present value of an investment or business based on its
expected future cash flows.
 can vary depending on the type, purpose, and complexity of the valuation.

CASH FLOW VALUATION TECHNIQUES

1) Discounted Cash Flow (DCF)
2) Net Present Value (NPV)
3) Internal Rate of Return (IRR)
4) Dividend Discount Model (DMM)

1) Discounted Cash Flow (DCF) COMPONENTS OF DCF FORMULA:

Discounted rate: Cost of capital for a
CF1 CF2 CFn
DCF = (1+r)1 + (1+r)2 + (1+r)n business
Periods of time: Time period DCF
analysis covers
 refers to a valuation method that estimates the value
Projected Cash Flow: Money
of an investment using its expected future cash expected to come in and out of a
flows. business
 DCF analysis attempts to determine the value of an Terminal Value: Future value of a
investment today, based on projections of how much business at the end of a projection
money that investment will generate in the future. period

Sample Problem: Let’s say you have a company the XYZ Inc., and you Year 1: ₱1 million
want to start a big project. Your company’s weighted average cost of Year 2: ₱2 million
capital is 8%, so you’ll use 8% for your discount rate. The project is set Year 3: ₱5 million
to last for five years, and your company needs to put in an initial Year 4: ₱5 million
investment of P13 million. Cash flows for the project are: Year 5: ₱7 million

Year Projected Cash Flow Discounted Cash Flow

1 (2023) 1,000,000 925,926
2 (2024) 2,000,000
3 (2025) 5,000,000
4 (2026) 5,000,000
5 (2027) 7,000,000
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Formula: Given:
CF1 CF2 CFn CF1 = ₱1,000,000
DCF = (1+r)1 + (1+r)2 + (1+r)n
CF2 = ₱2,000,000
CF3 = ₱5,000,000
Where: CF4 = ₱5,000,000
CF1 = Cash flow for the 1st period CF5 = ₱7,000,000
CF2 = Cash flow for the 2nd period r = 8% or 0.08
n = number of periods
r = discount rate

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