A discussion on methods of evaluating potential acquisitions for companies.
Written in 2008; 2,917 words; 18 sources; APA; $ 86.95
Paper Summary:
The paper provides relevant definitions, comparisons and an analysis of the effectiveness of three different investment evaluation methods that are commonly used to value companies: (a) net asset value, (b) price: earnings (P:E) ratio, and (c) discounted cash flow. The paper records a summary of the research and salient findings.
Outline:
Introduction
Review and Discussion
Conclusion
From the Paper:
"Discounted cash flow. According to Hussey (1999) the discounted cash flow (DCF) is, "A method of capital budgeting or capital expenditure appraisal that predicts the stream of cash flows, both inflows and outflows, over the estimated life of a project and discounts them, using a cost of capital or hurdle rate, to present values or discounted values in order to determine whether the project is likely to be financially feasible" (p. 131). A number of appraisal approaches incorporate the DCF principle in their analyses, such as the net present value, the internal rate of return, and the profitability index; in addition, most computer spreadsheet applications include a DCF appraisal routine (Hussey, 1999). On the downside, though, Lippitt and Mastracchio (1993) report that "the discounted cash flow method ... is infrequently used, as it superficially appears to be a difficult procedure to perform," a reference to the complexity of the calculations involved; the authors also note the infrequency of the use of the DCF method, but suggests that the problem is not just complexity of calculations, but rather the speculative nature of the projections necessary to employ DCF. "
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