Question

**Explain Discounted Cash
Flow (DCF) method of project evaluation**. **Explain
how real options can be lorated into project
evaluation.**

Answer #1

Discounted cash flow method estimates the future cash flows from a project and uses a discounting rate to arrive at the net present value of the project. It discount rate usually is the opportunity cost of the project or cost of capital/ equity. The inflows of the project are discounted and deducted from the present out flow to arrive the net present value. If the NPV is positive the project must be accepted and if it is negative it must be rejected.

Real options in investment decisions is allowing the use of decision tree, a binominal analysis or Black Scholes model in project evaluation. It considers the use of options such as postponement of the project, abandon the project , expansion of a project , the wait option, the option to switch and the costs related with the same. It is complementary to NPV analysis.

Why discounted cash flow method is more accurate compared to
non-discounted cash flow method?

1. Name and describe some of the advantages/disadvantages of
both the Discounted Cash Flow (DCF) and the Residual Operating
Income (ROPI) valuation models.

1- What conflicts can arise between using DCF methods for
capital budgeting decisions and accrual accounting for performance
evaluation? How can these conflicts be reduced?
2- How do discounted cash flow methods for capital budgeting fit
into the whole picture?
3-
Discounted Cash Flows involves Time Value of Money. Please define
this. What does it mean?

What is the difference between Discounted Cash Flows (DCF) and
Net Present Value (NPV)?
When would it be best for me to use DCF?
When would it be best for me to use NPV?
What is the Cash on Cash Return and how is it calculated?

4. Briefly explain the difference between the Discounted Cash
Flow and Capitalized Cash Flow valuation models.

Which of the following is a true statement? 1. IRR is the best
cash flow evaluation method and Payback is the worst method. 2. NPV
is the best cash flow evaluation method and IRR is the worst
method. 3. NPV is the best cash flow evaluation method and Payback
is the worst method. 4. PI is the best cash flow evaluation method
and IRR is the worst method.

Identify and elaborate the main difficulties associated with
Price Earnings (P:E) Ratio and Discounted Cash Flow (DCF) for
valuing companies which are not quoted in the Stock Market?

The IRR evaluation method assumes that cash flows from the
project are reinvested at a rate equal to the project’s IRR.
However, in reality, the reinvested cash flows may not necessarily
generate a return equal to the IRR. Thus, using the modified IRR
approach, you can make a more reasonable estimate of a project’s
rate of return than the project’s IRR can.
Consider the following situation:
Cold Goose Metal Works Inc. is analyzing a project that requires
an initial investment...

The IRR evaluation method assumes that cash flows from the
project are reinvested at the same rate equal to the IRR. However,
in reality the reinvested cash flows may not necessarily generate a
return equal to the IRR. Thus, the modified IRR approach makes a
more reasonable assumption other than the project’s IRR.
Consider the following situation:
Blue Llama Mining Company is analyzing a project that requires
an initial investment of $450,000. The project’s expected cash
flows are:
Year
Cash...

The IRR evaluation method assumes that cash flows from the
project are reinvested at the same rate equal to the IRR. However,
in reality the reinvested cash flows may not necessarily generate a
return equal to the IRR. Thus, the modified IRR approach makes a
more reasonable assumption other than the project’s IRR.
Consider the following situation:
Green Caterpillar Garden Supplies Inc. is analyzing a project
that requires an initial investment of $400,000. The project’s
expected cash flows are:
Year...

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