Question

, I would like for you to address three main questions: 1) In valuing a project, or even a firm, we work off of projections. This means that we must make assumptions. What are the biggest areas of assumptions in a valuation exercise? 2) How can we address these assumptions? 3) Now that you have learned the science of finance, how will you master the art of finance so that you can improve your work life? Your home life? Long story short, how will you use what we've learned this term to make yourself and the world a better place?

Answer 1

1. The biggest areas of assumptions are:

(a) Discount Rate

(b) Revenue or sales

(c) Cost of Sales/ Cost of goods sold

(d) Depreciation amount

2. How we address these assumptions:

(a) The appropriate discount rate. The discount rate we use to discount the future cash flow. If we choose a lower rate, we get a higher valuation and if we choose a higher rate, we get a lower valuation

(b) The accuracy of the forecasted sales figure. How accurate are these and what is the possibility of an error in the sales forecast?

(c) The expected cost of production and is that expected to be a constant for all levels or sales or are they proportional to the level of sales and

(d) The depreciation method used. If we use MACRS depreciation, we may depreciate more in the initial years. On the other hand, if we use a straight line, we may depreciate the same amount through the life of the project. SO choosing an appropriate depreciation method is also important

3. These concepts that are applied to a business can also to be applied on an individual self. We can forecast our expected incomes, reduce expenses and increase savings and improve our overall quality of life by adhering to these principles.