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8/10/2019 Corporate Finance Valuation Models
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Corporate Finance Assignment
I hereby certify that I am the sole author of this report. All assistance I have
received from outside sources have been documented in the report, as well
as, listed after the conclusion under “References.” This report was created
exclusively by me specically for the inancial and !ana"ement Accountin"
module at The #a"ue $niversity of Applied %ciences.
Student: Otto MartinezStudent Number: 10062289
Cohort: MFMC FT14-15Module: Corporate Finance
Lecturer Name: Drs. C..! Co"en#ran$erReport submission date: 12%4%2014
Total number of pages of submitted work: 10
ni!ersit": T&e !ag'e (ni)ersit* o+ App"ie$ ,ciences
#e"words: a*#ac erio$ / 3nterna" ate o+ et'rn /3 et resenta"'e / an$ ro7ta#i"it* 3n$e /3.
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Table of Contents1.0 T&eoretica" essentia"s o+ 3 an$ 3...........................................1
1.1 a*#ac erio$ /..............................................................................1
1.2 3nterna" ate o+ et'rn /3...................................................................1
1. et resent a"'e /..........................................................................1
1.4 ro7ta#i"it* 3n$e /3..............................................................................1
2.0 ,trengt&s an$ :eanesses o+ 3 an$ 3..................................2
2.1 a*#ac erio$ / ,trengt&s an$ :eanesses...................................2
2.2 3nterna" ate o+ et'rn /3 ,trengt&s an$ :eanesses.......................2
2. et resent a"'e / ,trengt&s an$ :eanesses..............................
2.4 ro7ta#i"it* 3n$e /3 ,trengt&s an$ :eanesses..................................
.0 , ;"ectronic ro<ects= a"'ation..............................................................4
.1 ro)i$e$ in+ormation...............................................................................4
.2 Cas& F"o> ,tatement..............................................................................5
.2.1 3nitia" Cas& O't?o>...........................................................................5
.2.2 3ncrementa" Cas& O't?o>s...............................................................6
.2. Termina" @ear 3ncrementa" Cas& O't?o>s.........................................
. , pro<ects appraisa".............................................................................
..1 ca"c'"ation..................................................................................8
..2 3 ca"c'"ation..................................................................................9
.. ca"c'"ation.................................................................................9
..4 3 ca"c'"ation.....................................................................................9
4.0 re+erre$ 3n)estment ro<ect...................................................................10
5.0 :ors Cite$..............................................................................................11
6.0 Disc"aimer................................................................................................12
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List of Tables
Ta#"e 1 , pro<ects initia" in)estments an$ reB'ire$ *ear"* sa)ings..............4
Ta#"e 2 Depreciation C"asses...........................................................................4
Ta#"e , pro<ects A initia" cas& o't?o>................................................5
Ta#"e 4 , pro<ects A incrementa" cas& o't?o>s.....................................6
Ta#"e 5 , pro<ects A termina" *ear incrementa" cas& o't?o>s..............
Ta#"e 6 , pro<ects appraisa" #ase$ on 3 an$ 3........................
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1.0 T&eoretica" essentia"s o+ 3 an$ 3
$%& Theoretical essentials of '(') *RR) N'+ and '*
$%$ 'a"back 'eriod ,'('-
A pro<ect=s pa*#ac perio$ is t&e n'm#er o+ *ears t&at it taes #e+ore t&e
c'm'"ati)e cas& ?o> eB'a"s t&e initia" in)estment /rea"e* M*ers an$ A""en
a*#ac p.105. T&e r'"e +or maing an in)estment is simp"e i+ t&e
pro<ect reco)ers its initia" in)estment >it&in t&e pre$etermine$ c'toE $ate it
s&o'"$ #e accepte$ e"se it s&o'"$ #e re<ecte$.
$%. *nternal Rate of Return ,*RR-
Accor$ing to rea"e* et a". 3 is t&e $isco'nt rate at >&ic& in)estment &as
zero net present )a"'eG /p.10. T&e rationa"e #e&in$ t&e 3 is t&at it
pro)i$es a sing"e n'm#er s'mmarizing t&e merits o+ a pro<ect an$ t&is
n'm#er $oes not $epen$ on t&e interest rate pre)ai"ing in t&e capita" maret
/!i""ier oss an$ :ester7e"$ T&e 3nterna" ate o+ et'rn p.155. Accor$ing
to !i""ier et a". a pro<ect s&o'"$ #e accepte$ i+ t&e 3 is &ig&er t&an t&e
$isco'nt rate an$ s&o'"$ #e re<ecte$ i+ t&e 3 is "ess t&an t&e $isco'nt rate
/p.156.
$%/ Net 'resent +alue ,N'+-
is $e7ne$ as A pro<ect=s contri#'tion to >ea"t& - present )a"'e min's
initia" in)estmentG /rea"e* M*ers an$ A""en p.92. t&ree attri#'tes are
t&at it 'ses cas& ?o>s it 'ses a"" t&e cas& ?o>s o+ t&e pro<ect an$ it
$isco'nts t&e cas& ?o>s proper"* #* taing into consi$eration t&e time )a"'e
o+ mone* /!i""ier oss an$ :ester7e"$ p.150. #asic in)estment r'"e is
s'mmarize$ as +o""o>ing accept a pro<ect i+ t&e is greater t&an zero.
e<ect a pro<ect i+ is "ess t&an zeroG /!i""ier oss an$ :ester7e"$ p.149.
$%0 'ro1tabilit" *nde2 ,'*-
3 is t&e ratio o+ present )a"'e cas& ?o>s s'#seB'ent to initia" in)estment
$i)i$e$ #* t&e amo'nt o+ initia" in)estment /!i""ier oss an$ :ester7e"$
p.165. T&is ratio te""s its 'ser >&ic& pro<ect >i"" oEer t&e &ig&est net present
)a"'e per $o""ar o+ initia" o't"a* /rea"e* M*ers an$ A""en p.115. T&e 3 is
app"ie$ in t&ree sit'ations. First >&en pro<ects are in$epen$ent an
age $ o+ $.
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1.0 T&eoretica" essentia"s o+ 3 an$ 3
in$epen$ent pro<ect s&o'"$ #e accepte$ i+ 3 is "arger t&an 1 an$ re<ecte$ i+
3 is "o>er t&an 1. ,econ$ >&en pro<ects are m't'a""* ec"'si)e 3 nee$s to
#e correcte$ 'sing incrementa". 3 is a ratio an$ t&'s ignores $iEerences o+
sca"e +or m't'a""* ec"'si)e pro<ects. Hast"* >&en t&e 7rm $oes not &as
eno'g& capita" to +'n$ a"" positi)e pro<ects an$ nee$s to imp"ement
capita" rationing /!i""ier oss an$ :ester7e"$ p.166.
.%& Strengths and 3eaknesses of '(') *RR) N'+ and '*
.%$ 'a"back 'eriod ,'('- Strengths and 3eaknesses
'(' Strengths:
perio$ is t&e simp"est >a* o+ comm'nicating an i$ea o+ pro<ect
pro7ta#i"it*. A$$itiona""* is 'se$ #eca'se it is easier to +orecast s&ort
term cas& ?o>s t&an "ong term cas& ?o>s. Hast"* are 'se$ as a
meas're o+ "iB'i$it*.
'(' 3eaknesses:
can res'"t in mis"ea$ing ans>ers #eca'se it ignores a"" cas& ?o>s a+tert&e c'toE $ate /rea"e* M*ers an$ A""en p.106. eca'se o+ t&is s&ort term
orientation )a"'a#"e "ong-term pro<ects mig&t #e ignore$ /!i""ier oss an$
:ester7e"$ p.151. F'rt&ermore $oes not consi$er timing o+ cas& ?o>s
/Time a"'e o+ Mone* an$ t&'s gi)es eB'a" >eig&t to a"" cas& ?o>s #e+ore
t&e c'toE $ate /!i""ier oss an$ :ester7e"$ p.151. Fina""* t&ere is an
ar#itrar* stan$ar$ +or t&e pa*#ac perio$. Capita" marets &e"p estimate t&e
$isco'nt rate 'se$ in t&e met&o$. !o>e)er t&ere is no g'i$e +or
c&oosing t&e pa*#ac c't-oE $ate so t&e c&oice is some>&at s'#<ecti)e
/!i""ier oss an$ :ester7e"$ p.152.
.%. *nternal Rate of Return ,*RR- Strengths and 3eaknesses
*RR Strengths:
age . o+ $.
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1.0 T&eoretica" essentia"s o+ 3 an$ 3
3 acco'nts +or Time a"'e o+ Mone* consi$ers a"" cas& ?o>s an$ is "ess
s'#<ecti)e.
*RR 3eaknesses:
T&e 7rst >eaness o+ 3 is >&en comparing an in)esting or 7nancing
$ecision. :&en in)esting a &ig& rate o+ ret'rn is $esire$. Contrasting"* >&en
recei)ing 7nancing a "o> rate o+ ret'rn is $esire$. 3n s'c& cases an 3 "ess
t&e opport'nit* o+ cost o+ capita" is reB'ire$ /rea"e* M*ers an$ A""en
p.109. A secon$ >eaness o+ t&e 3 is t&at >&en t&ere are c&anges in t&e
signs o+ cas& ?o>s t&ere >i"" #e m'"tip"e rates o+ ret'rn. 3n some cases t&ere
mig&t #e no interna" rate o+ ret'rn /rea"e* M*ers an$ A""en p.110. T&ir$
3 ignores $iEerences o+ sca"e o+ cas& ?o>s in m't'a""* ec"'si)e pro<ects
#eca'se it=s a ratio. Hast"* t&e 3 $oes not acco'nt +or more t&an one
opport'nit* cost o+ capita" /rea"e* M*ers an$ A""en p.11.
.%/ Net 'resent +alue ,N'+- Strengths and 3eaknesses
N'+ Strengths:
is #ase$ on cas& ?o>s. A$$itiona""* it inc"'$es a"" t&e cas& ?o>s o+ t&e
pro<ect an$ $isco'nts t&e cas& ?o>s proper"* #eca'se it consi$ers t&e time)a"'e o+ mone* >&en &an$"ing cas& ?o>s /!i""ier oss an$ :ester7e"$
p.150.
N'+ 3eaknesses:
One o+ t&e >eanesses o+ is its sensiti)it* to $isco'nt rates. Ca"c'"ating
t&e percentage n'm#er to an in)estment to represent a ris premi'm is not
an eact science. T&ere+ore t&e "e)e" o+ s'#<ecti)it* in t&e $isco'nt rate
/&o>e)er sma"" as it mig&t #e represents a $isa$)antage to t&e
met&o$o"og*. A secon$ $isa$)antage o+ t&e is t&at it ec"'$es rea"
options t&at ma* eist >it&in t&e pro<ect. To i""'strate a compan* t&at is
c'rrent"* "osing mone* ma* epan$ great"* in a +e> *ears= time &o>e)er
$oes not gi)e t&e option to inc"'$e t&e )a"'e o+ rea" options.
age / o+ $.
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1.0 T&eoretica" essentia"s o+ 3 an$ 3
.%0 'ro1tabilit" *nde2 ,'*- Strengths and 3eaknesses
'* Strengths:
T&e strengt&s o+ t&e 3 are simi"ar to t&e since it is #ase$ on $isco'nte$
present )a"'e cas& ?o>s min's initia" cas& o't?o> $i)i$e$ #* t&e initia" cas&o't?o> /or $i)i$e$ #* t&e initia" cas& o't?o> I one. A$$itiona""* >&en
+'n$s are "imite$ 3 &e"ps pic t&e pro<ects t&at oEer t&e &ig&est net present
)a"'e per $o""ar o+ initia" o't"a* /rea"e* M*ers an$ A""en p.115.
'* 3eaknesses:
3 >eanesses are simi"ar to t&ose o+ t&e . Moreo)er 3 is a ratio an$
t&'s ignores $iEerences o+ sca"e +or m't'a""* ec"'si)e pro<ects /rea"e*
M*ers an$ A""en p.116. ConseB'ent"* 3 on"* pro)i$es re"ati)e pro7ta#i"it*
an$ can potentia""* "ea$ to raning pro#"ems.
/%& 'S' 4lectronic 'ro5ects6 +aluation
/%$ 'ro!ided information
/Co"en#ran$er
age 0 o+ $.
Table $ 'S' pro5ects initial in!estments re7uired and "earl" sa!ings
Table . 8epreciation Classes
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1.0 T&eoretica" essentia"s o+ 3 an$ 3
/Co"en#ran$er
Ta ate 4J eB'ire$ ate o+ et'rn 14J et :oring Capita" 0
/%. Cash Flow Statement
For a $etai"e$ ep"anation o+ res'"ts an$ ana"*sis please double click on the
excel icon below
10062289KMartinezK
CorporateKFinanceK
/%.%$ *nitial Cash 9utow
Table / 'S' pro5ects A ; ( initial cash outow
/10062289KMartinezKCorporateKFinanceKa"'ationKMo$e"s
age < o+ $.
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1.0 T&eoretica" essentia"s o+ 3 an$ 3
Notes:
Cost o+ ne>G assets are gi)en
o capita"ize$ epen$it'res gi)en o >oring capita" o sa"e o+ o"$ asset/s o ta sa)ings $'e to sa"e o"$ assets
/%.%. *ncremental Cash 9utows
/10062289KMartinezKCorporateKFinanceKa"'ationKMo$e"s
age = o+ $.
Table 0 'S' pro5ects A ; ( incremental cash outows
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1.0 T&eoretica" essentia"s o+ 3 an$ 3
Notes:
et 3ncr. /$ecr. in operating re)en'e "ess /p"'s an* net incr. /$ecr. in
operating epenses ec"'$ing $epr. are gi)en /perio$ sa)ings et 3ncr. /$ecr. in ta $epreciation
• Asset et a"'e +or perio$ L Depreciation rate +or perio$ et c&ange in income #e+ore taes
• erio$ sa)ings Depreciation et incr. /$ecr. in taes
• 3ncome #e+ore taes L ta rate et c&ange in income a+ter taes
• 3ncome #e+ore taes - taes et incr. /$ecr. in ta $epr. C&arges
• Ta $epreciation ro<ect 3ncrementa" net cas& ?o> +or perio$
• 3ncome a+ter taes I Depreciation
/%.%/ Terminal >ear *ncremental Cash 9utows
/10062289KMartinezKCorporateKFinanceKa"'ationKMo$e"s
Notes:
3ncrementa" net cas& ?o> +or t&e termina" perio$ comes +rom Ta#"e 4, pro<ects A incrementa" cas& o't?o>sG perio$ /termina"
perio$ incrementa" net cas& ?o>. o ,a")age a"'e o Ta sa)ings $'e to asset sa"e or $isposa" o+ ne> assets o c&anges in net >oring capita"
age ? o+ $.
Table < 'S' pro5ects A ; ( terminal "ear
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1.0 T&eoretica" essentia"s o+ 3 an$ 3
/%/ 'S' pro5ects appraisal
/10062289KMartinezKCorporateKFinanceKa"'ationKMo$e"s
/%/%$ '(' calculation
a*#ac +orm'"a /#ase$ on "ect'res
First it is necessar* to ca"c'"ate c'm'"ati)e cas& ?o>s
age @ o+ $.
Table = 'S' pro5ects appraisal based on '(')
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1.0 T&eoretica" essentia"s o+ 3 an$ 3
T&en app"* +orm'"a.
/%/%. *RR calculation
3 >as ca"c'"ate$ 'sing 3G +orm'"a in ece".
/%/%/ N'+ calculation +orm'"a #ase$ on "ect'res
>as ca"c'"ate$ 'sing G +orm'"a in ece" 3nitia" cas& o't?o> /3CO
/%/%0 '* calculation
3 +orm'"a #ase$ on "ect'res
3 >as ca"c'"ate$ #* a$$ing one to t&e pre)io's"* ca"c'"ate$ $i)i$e$ #*
t&e 3CO.
age o+ $.
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1.0 T&eoretica" essentia"s o+ 3 an$ 3
0%& 'referred *n!estment 'ro5ectase$ on , pro<ects appraisa" 3 >o'"$ c&oose project B #ase$ on t&e
+o""o>ing )a"'ation mo$e" res'"ts
*nternal Rate of Return:
3nterna" rate o+ ret'rn is &ig&er t&an t&e $isco'nt rate
Net 'resent +alue:
et resent a"'e is greater t&an zero
'ro1tabilit" *nde2:
ro<ect 3 is "arger t&an 1
&'ro(ect ) has a paybac* period that is sli"htly lon"er than pro(ect A. #owever, due to the
many wea*nesses of the ')' and that no cuto+ period was provided my decision remained
in favor of pro(ect ).
age $& o+ $.
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1.0 T&eoretica" essentia"s o+ 3 an$ 3
<%& 3orks Cited
NAn ;as* ro#"em in Capita" ationing.N rea"e* ic&ar$ ,te>art M*ers an$
Fran"in A""en. 'rinciples of orporate inance Tenth -dition. e> @or
Mcra> !i"" 2011. 115. DF oo.
N3nterna" /or Disco'nte$-Cas&-F"o> ate o+ et'rn.N rea"e* ic&ar$
,te>art M*ers an$ Fran"in A""en. 'rinciples of orporate inance Tenth
-dition. e> @or Mcra> !i"" 2011. 10. DF oo.
Na*#ac.N rea"e* ic&ar$ ,te>art M*ers an$ Fran"in A""en. 'rinciples of
orporate inance Tenth -dition. e> @or Mcra> !i"" 2011. 105.
DF oo.
P. 'rinciples of orporate inance Tenth -dition. e> @or Mcra> !i""
2011. DF oo.
Co"en#ran$er C..!. NCorporate Finance Assignment.N orporate inance
Assi"nment . T&e !ag'e T&e !ag'e (ni)ersit* o+ App"ie$ ,ciences 15
o)em#er 2014. DF Doc'ment.
N6.1 :&* (se et resent a"'e.N !i""ier Da)i$ et a". orporate inance
-uropean -dition. ers&ire Mcra> !i"" 2010. 148-150. oo.
NT&e 3nterna" ate o+ et'rn.N !i""ier Da)i$ et a". orporate inance
-uropean -dition. ers&ire Mcra> !i"" 2010. 155-158. oo.
NT&e a*#ac erio$ Met&o$.N !i""ier Da)i$ et a". orporate inance
-uropean -dition. ers&ire Mcra> !i"" 2010. 150 - 151. oo.
age $$ o+ $.
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1.0 T&eoretica" essentia"s o+ 3 an$ 3
NT&e ro7ta#i"it* 3n$e.N !i""ier Da)i$ et a". orporate inance -uropean
-dition. ers&ire Mcra> !i"" 2010. 165-16. oo.
,agast'me Otto :i"+re$o Martinez.
N10062289KMartinezKCorporateKFinanceKa"'ationKMo$e"s.N//011234!artine54orporate4inance46aluation4!odels . T&e !ag'e
Otto :i"+re$o Martinez ,agast'me 14 o)em#er 2014. ;ce" Fi"e.
=%& 8isclaimer
A"" ig&ts eser)e$. o part o+ t&is p'#"ication ma* #e repro$'ce$ store$ ina retrie)a" s*stem or transmitte$ in an* +orm #* an* means e"ectronicmec&anica" p&otocop*ing recor$ing or ot&er>ise >it&o't t&e priorpermission o+ t&e p'#"is&er Otto Martinez.
T&e +acts o+ t&is report are #e"ie)e$ to #e correct at t&e time o+ p'#"ication
#'t cannot #e g'arantee$. "ease note t&at t&e 7n$ings conc"'sions an$
recommen$ations t&at Otto Martinez $e"i)ers >i"" #e #ase$ on in+ormation
gat&ere$ in goo$ +ait& +rom #ot& primar* an$ secon$ar* so'rces >&ose
acc'rac* &e is not a">a*s in a position to g'arantee. As s'c& Otto Martinez
can accept no "ia#i"it* >&ate)er +or actions taen #ase$ on an* in+ormation
t&at ma* s'#seB'ent"* pro)e to #e incorrect.
age $. o+ $.