Business
Project Valuation
Project valuation is the process of determining the financial worth of a specific business project. It involves assessing the potential returns and risks associated with the project to make informed investment decisions. By using various valuation methods such as discounted cash flow analysis or comparable company analysis, businesses can gauge the viability and profitability of their projects.
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8 Key excerpts on "Project Valuation"
eBook - PDF- Jack Broyles(Author)
- 2003(Publication Date)
- Wiley(Publisher)
Valuation of Investment and Real Options 5 An Introduction to the Appraisal of Capital Projects 77 6 Pitfalls in Project Appraisal 96 7 Further Project Appraisal Methods 1 16 8 Appraising Projects with Real Options 1 34 9 Valuing Interrelated Real Options 1 55 10 Valuation of Companies with Real Options 1 74 11 Mergers and Acquisitions 1 94 An Introduction to the Appraisal of Capital Projects Capital project appraisal is the financial analytical process of strategy implementation. The object of project appraisal is to assess whether strategies, as implemented by projects, add value for the company’s shareholders. Capital projects are investments that frequently involve the purchase of a physical asset, such as a machine or a new factory. A capital project can also involve investment in a less tangible asset, such as a new product or service or an advertizing campaign. Usually, a capital project entails paying cash now or in the near term in order to obtain a return of more cash later. In this chapter, we shall show how financial managers estimate the present value (PV) of a project’s future cash flows for its shareholders. Using discounted cash flow methods, we show how to decide whether a project is worth more than it costs, and we compare discounted cash flow with other methods that are in use. In this chapter, we focus mostly on standard industrial practice, leaving consideration of the inherent pitfalls and advanced practice to subsequent chapters. TOPICS The issues considered are: capital budgeting; competitive advantage and value creation; project appraisal; incremental cash flow and incremental value; net present value (NPV); the rate of return on a project; project liquidity; related issues; taxes; project risk and the discount rate; real options. 5-1 CAPITAL BUDGETING BUDGETS Companies usually follow a capital budgeting procedure for allocating funds to capital projects. Each division of a company may have its own capital budget.
No longer available |Learn more- (Author)
- 2014(Publication Date)
- College Publishing House(Publisher)
_____________WORLD TECHNOLOGIES_____________ Chapter- 4 Project Valuation Business valuation Business valuation is a process and a set of procedures used to estimate the economic value of an owner’s interest in a business. Valuation is used by financial market participants to determine the price they are willing to pay or receive to consummate a sale of a business. In addition to estimating the selling price of a business, the same valuation tools are often used by business appraisers to resolve disputes related to estate and gift taxation, divorce litigation, allocate business purchase price among business assets, establish a formula for estimating the value of partners' ownership interest for buy-sell agreements, and many other business and legal purposes. Standard and premise of value Before the value of a business can be measured, the valuation assignment must specify the reason for and circumstances surrounding the business valuation. These are formally known as the business value standard and premise of value. The standard of value is the hypothetical conditions under which the business will be valued. The premise of value relates to the assumptions, such as assuming that the business will continue forever in its current form (going concern), or that the value of the business lies in the proceeds from the sale of all of its assets minus the related debt (sum of the parts or assemblage of business assets). Business valuation results can vary considerably depending upon the choice of both the standard and premise of value. In an actual business sale, it would be expected that the buyer and seller, each with an incentive to achieve an optimal outcome, would determine the fair market value of a business asset that would compete in the market for such an acquisition. If the synergies are specific to the company being valued, they may not be considered. Fair value also does not incorporate discounts for lack of control or marketability.
eBook - PDF- Amos Haniff, Mohamed Salama, Amos Haniff, Mohamed Salama(Authors)
- 2016(Publication Date)
- Goodfellow Publishers(Publisher)
47 3 Project Financial Appraisal The investment decisions are also referred to as ‘capital budgeting’ or ‘capital expenditure’ decisions because most firms prepare budgets for their future pro-jects. The two primary goals of this chapter are to describe how to deal with rates of return and how to make an ‘Accept’ or ‘Reject’ decision on investment projects. “To understand the use and application of most project evaluation methods, knowledge of basic engineering economics concepts such as equivalence, time value of money (TVM), cash-flow diagrams, and economic evaluation factors is required” (Remer and Nieto 1995, p. 80). Figure 3.1 show economic valuation 10-step for project appraisal proposed by Remer and Nieto (1995). REJECT Define a set of investment projects for consideration Establish the planning horizon (or analysis period) Estimate the cash flow profile for each project Specify the time value of money or minimum attractive rate of return Examine the objective and establish criteria to measure effectiveness Apply the project evaluation technique(s) Compare each project proposal for preliminary acceptance or rejection Perform sensitivity analysis Based on the established criteria ACCEPT Figure 3.1: Economic evaluation steps (Remer and Nieto, 1995) Project Management 48 In the first section of Chapter 3, we assume that there are no taxes, no transac-tion costs, no disagreements, and no limits as to the number of buyers and sellers in the market. This is the so-called ‘perfect market’. In Section 3.2, we start from the concept of the time value of money and the rate of return. Next, we explain a number of methods for project appraisal such as payback period, discount payback period, average rate of return, net present value, the internal rate of return and the modified internal rate of return. After studying this chapter, you should have an understanding of the techniques to use to arrive at the best investment decision when investment capital is rationed.
No longer available |Learn more- (Author)
- 2014(Publication Date)
- Orange Apple(Publisher)
____________________ WORLD TECHNOLOGIES ____________________ Chapter- 2 Business Valuation The five most common ways to valuate a business are • asset valuation, • historical earnings valuation, • future maintainable earnings valuation, • relative valuation (comparable company & comparable transactions), • discounted cash flow (DCF) valuation Professionals who valuate businesses generally do not use just one of these methods but a combination of some of them, as well as possibly others that are not mentioned above, in order to obtain a more accurate value. The information in the balance sheet or income statement is obtained by one of three accounting measures: a Notice to Reader, a Review Engagement or an Audit. Accurate business valuation is one of the most important aspects of M&A as valuations like these will have a major impact on the price that a business will be sold for. Most often this information is expressed in a Letter of Opinion of Value (LOV) when the business is being valuated for interest's sake. There are other, more detailed ways of expressing the value of a business. While these reports generally get more detailed and expensive as the size of a company increases, this is not always the case as there are many complicated industries which require more attention to detail, regardless of size. Valuation In finance, valuation is the process of estimating the potential market value of a financial asset or liability. Valuations can be done on assets (for example, investments in marketable securities such as stocks, options, business enterprises, or intangible assets such as patents and trademarks) or on liabilities (e.g., Bonds issued by a company). Valuations are required in many contexts including investment analysis, capital budgeting, merger and acquisition transactions, financial reporting, taxable events to determine the proper tax liability, and in litigation.
eBook - ePub- Dennis Lock(Author)
- 2020(Publication Date)
- Routledge(Publisher)
6 Financial Appraisal and the Business PlanT he methods and procedures described in previous chapters have not advanced us very far through the project life cycle, and there will be more data to analyse and more decisions to be made before any actual project work can be authorized. But at least we should now have an outline definition of the project, together with an estimate of what it should cost and an initial idea of how long it will take to complete. This chapter advances the process of project consideration a little farther by comparing the estimated time and costs with the benefits that the project investor or owner wants. Those data and comparisons will form the basis of the business plan or project proposal.Project Feasibility Analysis
Managers frequently have to make decisions on whether or not to authorize investment in a project, or they might be asked to decide between two or more different project options. Depending on the type of project under consideration, their final decision will depend on many factors, including answers to questions like the following:
eBook - PDFCapital Budgeting
Financial Appraisal of Investment Projects
- Don Dayananda, Richard Irons, Steve Harrison, John Herbohn, Patrick Rowland(Authors)
- 2002(Publication Date)
- Cambridge University Press(Publisher)
6 Project analysis under certainty In the previous chapters, we have discussed the identification and estimation of project cash flows and illustrated the mathematical formulae essential for project evaluation. This chapter now uses these elements for investment analysis. There are two groups of project evaluation techniques: discounted cash flow (DCF) analysis and non-discounted cash flow (NDCF) analysis. The first group includes the net present value (NPV) and the internal rate of return (IRR). The second group includes the payback period (PP) and the accounting rate of return (ARR). Generally, DCF analysis is preferred to NDCF analysis. Within DCF analysis, the theo-retical and practical strengths of NPV and IRR differ. Theoretically, the NPV approach to project evaluation is superior to that of IRR. The NPV technique discounts all future project cash flows to the present day to see whether there is a net benefit or loss to the firm from investing in the project. If the NPV is positive, then the project will increase the wealth of the firm. If it is zero, then the project will return only the required rate of return, and will not increase the firm’s wealth. If the NPV is negative, then the project will decrease the value of the firm and should be avoided. In spite of the theoretical superiority of the NPV technique, project analysts and decision-makers sometimes prefer to use the IRR criterion.The preference for IRR is attributable to the general familiarity of managers and other business people with rates of return rather than with actual dollar returns (values). Since interest rates, profitability, investment income and so on are normally expressed as annual rates of return, the use of IRR makes sense to financial decision-makers. They find it easy to understand, and useful for comparing the profitability of alternative investments.
eBook - PDFEntrepreneurial Finance
Venture Capital, Deal Structure & Valuation, Second Edition
- Janet Kiholm Smith, Richard L. Smith(Authors)
- 2019(Publication Date)
- Stanford Business Books(Publisher)
Second, the entrepreneur can better understand what the venture should be worth to him and how that differs from its value to the investor. Third, the entrepreneur needs to understand how alternative deal structures affect overall value and the values of the financial claims of investors and the entrepreneur. Even for very early-stage ventures, where “unpriced” rounds are common, it would be difficult to reach agreement on deal terms without a sense of the value of the opportunity. The entrepreneur might expect that competition among prospective investors can eliminate the need to value complex financial claims. This expectation is incorrect. Even if several investors are vying to participate in a venture, they may have varying views of the venture’s strategy and will probably seek different structures of ownership claims and financing commitments. Without studying the valuation consequences of different proposals, choosing the best alternative can be problematic for the entrepreneur. A solid understanding of basic valua-tion techniques can ensure that entrepreneurs better understand how investors perceive the opportunity and help to reach a mutually beneficial agreement. 10.3 AN OVERVIEW OF VALUATION METHODS For an investor who cares only about financial return, the value of any invest-ment is the PV of its future cash flows. Although a variety of methods exist for estimating value, ranging from explicit discounting of future cash flows to valuation based on simple multiples to valuation based on comparable firms, they all are attempting to measure, directly or indirectly, the PV of the right to receive future cash flows. As discussed in Chapter 1, valuation is guided by two fundamental principles: that a dollar today is worth more than a dollar received in the future, and that a safe dollar is worth more than a risky one, that is, a safe dollar is more valu-able than a gamble with an expected payoff of one dollar.
eBook - PDFEntrepreneurial Finance for MSMEs
A Managerial Approach for Developing Markets
- Joshua Yindenaba Abor(Author)
- 2016(Publication Date)
- Palgrave Macmillan(Publisher)
In this chapter, we look at how entrepreneurial firms are valued. We spe- cifically discuss valuation of business ventures. We also examine the various methods of valuation and the criteria for selecting a new venture valuation model. The knowledge acquired in time value of money and capital budget- ing is important in appreciating the issues discussed under valuation of new ventures and small businesses. 13.2 Valuation of Business Ventures Valuation is a difficult yet an important aspect of the business investment process and this exercise is required to be carried out on regular basis. What value should an entrepreneur place on the firm when they initially seek equity from external investors? What should the external investor pay to invest in the firm? What is the appropriate valuation when additional financing is required? What is the appropriate valuation at the time of existing or harvest- ing the investment? Valuation is concerned with the process of determining the amount an investor needs to pay to invest in a firm. When investors invest in a firm, they assume ownership interest and therefore, in exchange for their investment, they receive the firm’s shares. If an investor is interested in holding say 20 % of the firm, it will be necessary to first determine what the entire firm is worth. The investor will then ascertain exactly how much to offer for the 20 % stake in the firm. On the other hand, the entrepreneur will decide whether he/she is prepared to give up 20 % ownership in the firm for the price offered by the investor. The value of the firm may be expressed in total (say US$20 million) or on a per share basis (say US$3.25 per share). In the case of publicly listed companies, the value of the firm is deter- mined on per second basis by investors (buyers and sellers of the shares) on the stock exchange. The problem however, is with respect to valuing new ventures, private companies and small businesses that are not listed on the public exchange.
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