when evaluating the future value of a potential investment in a project or equipment. which would...

when evaluating the future value of a potential investment in a project or equipment. which would be the best method for business valuation? give the steps to follow that business valuation

Expert Solution

Answer:

Future value- It is the value of a sum of money in the future.

Business valuation method based on Future value-

Discounted cash flow model- This model is based on expected future cash flows of an investment. It is an intrinsic value approach. In this method, future cash flows are expected and discounted to the present value factor to know the present worth of them. It projects the value of investment in the future.

Steps in DCF method-

Projection of Free cash flows
Choosing a discount rate, companies generally take weighted average cost of capital (WACC) as discount rate.
Calculating Terminal value (Value at the end of the Free cash flow projection period)
Calculating the Enterprise value by discounting the projected unlevered free cash flows and Terminal value to net present value.
Calculating the Equity value after subtracting net debt from Enterprise value.
Comparing the discounted cash flows to the current cost, opportunity will result in positive cash flows.
Compare and review the results.

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