Discounted Cash Flow Model Research Articles

Maximizing Returns and Minimizing Risks in Hybrid Renewable Energy Systems: A Stochastic Discounted Cash Flow Analysis of Wind and Photovoltaic Systems in Brazil

The use of renewable energy sources has become strategic in the production of electricity worldwide due to global efforts to increase energy efficiency and achieve a net zero carbon footprint. Hybrid systems can maximize stability and reduce costs by combining multiple energy sources. A conventional metric, such as the levelized cost of energy (LCOE), that is appropriate for assessing the cost-effectiveness of an option may not be appropriate when evaluating the economic feasibility of hybrid systems. This study proposes a stochastic discounted cash flow model (DCF) to assess the economic viability of a hybrid renewable energy system (HRES) in Brazil. The objective is to determine the combinations that will provide the highest 50th percentile internal rate of return (IRR) and the lowest coefficient of variation (CV). Model variables include capital expenditures (CAPEX), operation and maintenance (O&M) costs, sectoral charges, taxes, and long-term energy production metrics. The results demonstrate that the synergies modeled contributed to the higher economic outcomes for the HRES obtained by combining both energy sources rather than opting for a stand-alone configuration. A wind-dominant combination of 60% wind was able to increase the 50th percentile of the IRR, while a solar-dominant combination of 65% solar minimized the CV.

Discussion on the Advantages and Disadvantages of the DCF Model in the Current Era and the Improvement of the Model

The discounted cash flow model is a company value evaluation method widely used by many domestic investors when investing company. However, under the background of the epidemic, due to factors like low benchmark interest rates that are not conducive to the valuation of the DCF model, the accuracy of the discounted cash flow model valuation has been questioned. In addition, the DCF model is not entirely applicable to the domestic market because of the multiple systems and the local capital market's imperfections, so the model needs to be improved. In this paper, the existing literature is summarized, and it was found that the time series analysis method can be used, which can predict the company's future cash flow more accurately, instead of the sales ratio analysis method, while the discount rate can be calculated more accurately by substituting each company's beta into the calculation instead of using the company's industry beta.

The Valuation Analysis of NEXT.PLC based on the DCF Model

The discounted cash flow model (DCF) is also widely used to estimate the value of a company, and despite the simplicity of the DCF model, this valuation has certain drawbacks as the uncertainty of the estimate and the assumptions made when forecasting are not negligible. In this paper, financial information from NEXT.plc is used to carry out a business valuation and compare it with the current market capitalisation. The calculations lead to the conclusion that the original valuation performed by the DCF model is higher than the current market capitalisation of the company. The assumptions used in the valuation are subject to change with the actual economic environment, and therefore the results obtained are somewhat different from the actual. It is recommended that more understanding of the social and economic context be required when applying the DCF model to valuations.

Application Analysis of DCF Model in Enterprise Value Evaluation: A Case Study of Midea

With the development of markets of household electric appliances and the extinct sales performance of Midea, Midea should be viewed as a good example to explore. Many company values are overstated or understated, which has caused major problems for the stability of markets. Therefore, the author made an effort to determine the company's value so that it could be compared to its market capitalization to determine whether it is underpriced or overpriced. And in order to do that, the company was examined using the discounted cash flow (DCF) model. It was discovered that the market price of Midea should be around 384.92 billion CNY, which is slightly higher than its actual market capitalisation. As a result, although there might be some deviations made by some other factors, that might indicate that Midea has been marginally underpriced in the market.

The profitability of artificial and natural regeneration: A forest investment comparison of Poland and the U.S. South

The historical development of silviculture has been closely related to an increasing need for timber, which resulted in more planted forests and artificial regeneration over time. The idea of natural regeneration through shelterwood cutting was often not accepted by forest owners as a management practice because of inadequate financial returns and less certain outcomes. Despite the evolving dominance of planted forests, questions remain if the lower costs of natural regeneration may still provide sufficient profitability of forest investments. In this paper, the profitability of planted versus natural forest management in Poland and the U.S. South was examined. A discounted cash flow model was developed to evaluate the profitability of artificial and natural regeneration in hypothetical Scots and loblolly pine stands in Poland and the U.S. South, respectively, and hardwood stands (dominated by oak spp.) in both countries. The results have shown that for both countries and species, natural regeneration regimes produce higher internal rates of return (IRR), largely due to less expensive establishment costs. The largest difference in returns is observed for hardwood in the US South (97 basis points, bps, or almost 1 percentage point), followed by pine in the US South (84 bps) and pine and hardwood in Poland (both ca. 70 bps). Southern pines in the U.S. South may have larger net present values (NPV) at moderate discount rates, as well as provide more certain wood production outcomes, which have contributed to their pervasive adoption. We conclude that natural stand forest management, in addition to better rates of return, may bring other non-financial benefits (e.g., genetic diversity, resilience), which may support forest owners and the environment, especially under changing climate conditions. Nevertheless, the regeneration method and its feasibility and profitability should be carefully considered on a case-by-case basis for each forest investment.

Methods for Evaluating Digital Financial Assets as the Basis for Future Trade Turnover

The author analyzes methods of cryptocurrency evaluation existing in foreign practice. Applicability of the comparative, income and cost approaches used in valuation activities, as well as possible methods within each of the approaches, is explored. It is determined that within the income approach, the discounted cash flow model and the exchange equation are applicable. The comparative approach involves the classic comparison of sales, while the cost approach contains two methods based on actual (energy cost method) and forecast (stock-flow ratio method) data.

Assessment of ESG Integration in Corporate Valuation in GCC Region

The concept of Sustainability has been gaining steam in the past few decades in the boardrooms of corporations and regulators in order to decisively address the ecological and social impacts of operations carried by thousands of organizations around the globe. The ESG Score has been established in order to uniformly assess the considerations and effectiveness of initiatives taken by organizations to improve their ecological outlook, or internal relations and interactions among various levels of staff throughout the organizational structure. This paper aims to assess any relationship that may arise between the valuation and capital structure of an organization through assessing the ESG Score, as well as its individual components, namely Environmental, Social and Governance components, upon the Cost of Equity, Cost of Debt, Return on Equity, and Dividend Payout Ratio. The methodology used to observe any correlation between these variables is to conduct OLS regressions between the ESG Score, as well as each of its individual components, with the variables relating to the different methods of valuation, namely the Discounted Cash Flow Model and the Dividend Discount Model. A positive causality was observed between the environmental score and both free cash flow and profitability. Furthermore, we noted a strong association between the overall ESG score and the dividend payout ratio. Further observations were derived from juxtapositions between indices of publicly traded companies ranked based on their ESG performance and companies ranked by their equity, in the markets situated in the United Arab Emirates and the United States. Comparisons were also made between indices assessing the performance of conventional Bonds and Green Bonds.

Economic evaluation of a community health worker model for tuberculosis care in Ho Chi Minh City, Viet Nam: a mixed-methods Social Return on Investment Analysis

BackgroundThere is extensive evidence for the cost-effectiveness of programmatic and additional tuberculosis (TB) interventions, but no studies have employed the social return on investment (SROI) methodology. We conducted a SROI analysis to measure the benefits of a community health worker (CHW) model for active TB case finding and patient-centered care.MethodsThis mixed-method study took place alongside a TB intervention implemented in Ho Chi Minh City, Viet Nam, between October-2017 – September-2019. The valuation encompassed beneficiary, health system and societal perspectives over a 5-year time-horizon. We conducted a rapid literature review, two focus group discussions and 14 in-depth interviews to identify and validate pertinent stakeholders and material value drivers. We compiled quantitative data from the TB program’s and the intervention’s surveillance systems, ecological databases, scientific publications, project accounts and 11 beneficiary surveys. We mapped, quantified and monetized value drivers to derive a crude financial benefit, which was adjusted for four counterfactuals. We calculated a SROI based on the net present value (NPV) of benefits and investments using a discounted cash flow model with a discount rate of 3.5%. A scenario analysis assessed SROI at varying discount rates of 0-10%.ResultsThe mathematical model yielded NPVs of US$235,511 in investments and US$8,497,183 in benefits. This suggested a return of US$36.08 for each dollar invested, ranging from US$31.66-US39.00 for varying discount rate scenarios.ConclusionsThe evaluated CHW-based TB intervention generated substantial individual and societal benefits. The SROI methodology may be an alternative for the economic evaluation of healthcare interventions.

Techno-Economic Analysis of Thermochemical Conversion of Waste Masks Generated in the EU during COVID-19 Pandemic into Energy Products

During the COVID-19 pandemic, more than 24 billion pieces of surgical mask waste (WM) were generated in the EU region, with an acute shortage of their management and recycling. Pyrolysis and gasification are among the most promising treatments that were proposed to dispose of WMs and convert them into pyrolysis oil and hydrogen-rich syngas. This work aimed to investigate the techno-economic analysis (TEA) of both treatments in order to assess the feasibility of scaling up. The TEA was carried out using a discounted cash flow model and its data were collected from practical experiments conducted using a fluidised bed pyrolysis reactor and bubbling fluidised bed gasifier system with a capacity of 0.2 kg/h and 1 kg/h, respectively, then upscaling to one tonne/h. The technological evaluation was made based on the optimal conditions that could produce the maximum amount of pyrolysis oil (42.3%) and hydrogen-rich syngas (89.7%). These treatments were also compared to the incineration of WMs as a commercial solution. The discounted payback, simple payback, net present value (NPV), production cost, and internal rate of return (IRR) were the main indicators used in the economic feasibility analysis. Sensitivity analysis was performed using SimLab software with the help of Monte Carlo simulations. The results showed that the production cost of the main variables was estimated at 45.4 EUR/t (gate fee), 71.7 EUR/MWh (electricity), 30.5 EUR/MWh (heat), 356 EUR/t (oil), 221 EUR/t (gaseous), 237 EUR/t (char), and 257 EUR/t (syngas). Meanwhile, the IRR results showed that gasification (12.51%) and incineration (7.56%) have better economic performance, while pyrolysis can produce less revenue (1.73%). Based on the TEA results, it is highly recommended to use the gasification process to treat WMs, yielding higher revenue.

Techno‐economic and policy analysis of hydrogen and gasoline production from forest biomass, agricultural residues and municipal solid waste in California

AbstractTechno‐economic and policy analyses were performed of hydrogen and gasoline production from forest biomass (FB). They were compared with fuels produced using agricultural residues and municipal solid waste in California. Twelve process designs were analyzed, with and without carbon capture and storage, and life‐cycle analysis was performed, using California's Greenhouse Gases, Regulated Emissions, and Energy Use in Transportation (GREET) 3.0 model, to calculate the average life‐cycle carbon intensity of different process designs for hydrogen and gasoline. Discounted cash flow models were developed to assess profitability in terms of the net present value and internal rate of return (IRR). The results showed that forest‐to‐fuel pathways (positive IRR between 2%−16%) were the least competitive biomass‐based pathway option. Sensitivity analysis was performed on economic parameters including feedstock price and renewable identification number (RIN) credit price. In the case of RIN credits, profitability declined significantly as the proportion of FB from federal lands increased given existing statutory limitations. Given the importance of increasing forest management to reduce wildfire risks, the necessary additional policy incentives were quantified to equalize the cost of forest‐to‐fuels pathways with the other biofuels pathways. To ensure FB‐to‐fuels pathways are cost competitive with agricultural residues, policymakers could increase the low carbon fuel standard (LCFS) credit price for forest fuels (additional credit price support of $41–75 t/CO2e), give additional credit to lifecycle emissions reductions from forest fuels (additional carbon intensity decrease of 19–76 gCO2e MJ−1), provide concessionary debt or equity with a target weighted average cost of capital (WACC) = 3–4%, subsidize capital costs (12–22% of costs), or subsidize FB delivery ($35–66 per dry ton delivered).

Evaluation of the economic implications of varied pressure drawdown strategies generated using a real-time, rapid predictive, multi-fidelity model for unconventional oil and gas wells

Experience has suggested that pressure maintenance in hydraulically fractured reservoirs via lower, more sustained production drawdowns may offer improved cumulative recovery and overall resource extraction efficiency compared to more rapid drawdown approaches aimed at generating high initial production. However, given the inherent variability of oil and natural gas markets, operators pursue production strategies that maximize profitability over resource extraction efficiency. This study focuses on evaluating the implications of contrasting pressure drawdown strategies on the long-term production and resulting economics for a real, producing unconventional gas well in the Marcellus Shale of the Appalachian Basin using a techno-economic analysis approach. Our research combines elements of well-specific horizontal well design, production forecasting, equipment sizing and capital cost estimation, operating cost estimation, and revenue and tax calculations. Gas production forecast outlook scenarios were generated under varying pressure drawdowns using two approaches: 1) a novel physics-informed machine learning workflow and 2) traditional reservoir simulation. A discounted cash flow model was used to evaluate the resulting economic implications for each drawdown scenario—generating output for exploring the coupled effect of factors like the timing and volume of gas production, prevailing economic and market conditions for natural gas, and overall estimated ultimate recovery on profitability metrics such as internal rate of return and net present value. Results show that there is potential to maximize the cumulative gas produced in the specific case study well by employing a lower pressure drawdown. Conversely, the greatest profitability is achieved using rapid drawdown as signified by a small, specific subset of our outlook scenarios. On an averaging basis, we find that the combinations of highest cumulative producing and most profitable scenarios occur under lower drawdowns with long (>40 years) producing timeframes, but require higher relative gas price and lower discounting considerations. The machine learning predictive outlooking capability proved effective for enabling rapid generation of a multitude of scenario forecasts. As a result, a variety of prominent example cases could be generated to strike the balance of greater productivity and economic return given their associated producing features and economic conditions when compared to similar producing scenarios—critical insight that offers improved decision support for unconventional oil and gas operations.

Business Valuation Analysis: Taking Lululemon as an Example

Lululemon's unique and innovative brand culture and concept, combined with the pursuit of healthy living and the globalization of sport, has led to the company's global growth. Lululemon’s creative fabric technology and design also enhanced its competitive edge. From the perspective of politics, economy, society and technology, due to the rapid expansion and emerging yoga culture and heathy life concepts, it might be overvalued according to its leading and fast-growing status in the athletic clothing market. In this paper, P/E ratio, forward P/E ratio, EV/EBITDA ratio and discounted cash flow model are adopted to value the company. The results of valuation ratios of Lululemon are higher than other competitors, and the data generated from the discounted cash flow model is lower than its current market value, indicating that the price of Lululemon is indeed overestimated. This paper would provide the investors an overview of Lululemon’s brand history, market position and basic valuation statistics.

How does better quality data affect the value of a mining project?

With the advent of 3D software applications into geology and resource modeling world, data quality is going to become an issue. Electronic data can easily be corrupted due to weak data housing and ownership. Many people are aware of the issue, but they may not know how much it can affect the value of a mining project especially when making investment decisions.This research investigates the question How does better quality data affect the value of a mining project? Two geological primary data datasets were created. The first dataset was named “initial”; after manual entry errors were removed a second dataset was named “improved” (or verified). All the data errors raise from inadvertent human mistakes and coming out the source files. The methodology consisted of constructing two models for resource estimation based on both datasets, followed by developing two financial assessments and comparing their results. The approach was applied to evaluate the central orebody of the Erdenet-Ovoo copper-molybdenum group deposits in Mongolia. The actual operational and costing information of the existing operation was used for financial assessment. The most assumptions and parameters for the financial assessment were analysed and estimated to plug into the financial models.
 The answer to the research question is not just a matter of finding a simple discrepancy in the resource amounts and Net Present Value (NPV) by discounted cash flow models. The study also examines project risks and compares the probabilistic distributions of NPVs for the two models based on the decision-making ability of them. It is found that the improved model is more accurate than the initial one and can provide a better decision making. Specifically, having better-quality data increases the probability of the project to make a profit by over 7% and 2.7% with a higher chance that the NPV will be greater than $100M in this case study.

Stock Valuation and Business Performances of Indonesia Health Care Provider Company after Post Covid 19 Pandemics (Case Study of PT. Medikaloka Hermina, Tbk.)

The Covid-19 pandemic caused a contraction in the Indonesian economy, as evidenced by the large number of layoffs, and several companies had to declare bankruptcy, but this did not occur for companies engaged in health services, including hospitals. The large number of Indonesians infected with the Covid-19 virus caused hospitals to experience an increase in inpatient admissions, which accelerated the hospitals’ financial performance in a very short period of time. PT Mediloka Hermina, Tbk (HEAL) is a private hospital with the greatest number of branches in Indonesia, all of which are impacted by the Covid-19 pandemic. This is also a positive sentiment among stock investors, as they perceive the health industry sector to have very promising future prospects. Several listed hospital company on the IDX have seen their share prices increase significantly over the past year, including PT. Mediloka Hermina, Tbk, whose share price increased by 197 percent between 23 March 2020 and 23 March 2021. This made the author curious about PT Mediloka Hermina, Tbk’s stock valuation and whether its shares are classified as overvalued or undervalued. This study utilizes secondary data obtained from the annual report of PT. Mediloka Hermina, Tbk as well as idx.co.id and stockbit.com, among others. The data was processed with the absolute valuation method (Discounted Cash Flow) and the relative valuation method (Relative Value) in mind (EV EBITDA and Price Earnings to Ratio). Using the Discounted Cash Flow model, the company’s intrinsic value is IDR 452.80 per share. It has a safety margin of -135 percent relative to the per-share market price of IDR 1,065 as of 31 December 2021. The intrinsic value per share is 688 IDR based on the relative price-to-earnings ratio and relative valuation EV EBITDA of 7.21. Following the evaluation procedure. The author may determine the relationship between HEAL’s fundamental company and its stock price growth.

Uncertainty in firm valuation and a cross-sectional misvaluation measure

The degree of uncertainty associated with the value of a company plays a relevant role in valuation analysis. We propose an original and robust methodology for company market valuation, which replaces the traditional point estimate of the conventional Discounted Cash Flow model with a probability distribution of fair values that convey information about both the expected value of the company and its intrinsic uncertainty. Our methodology depends on two main ingredients: an econometric model for company revenues and a set of firm-specific balance sheet relations that are estimated using historical data. We explore the effectiveness and scope of our methodology through a series of statistical exercises on publicly traded U.S. companies. At the firm level, we show that the fair value distribution derived with our methodology constitutes a reliable predictor of the company’s future abnormal returns. At the market level, we show that a long-short valuation (LSV) factor, built using buy-sell recommendations based on the fair value distribution, contains information not accessible through the traditional market factors. The LSV factor significantly increases the explanatory and the predictive power of factor models estimated on portfolios and individual stock returns.

МАТЕМАТИЧНІ МЕТОДИ ДЛЯ ДОСЛІДЖЕННЯ ВАРТОСТІ КОМПАНІЙ В УГОДАХ ЗЛИТТЯ ТА ПОГЛИНАННЯ (M&A TRANSACTIONS)

The results of the research of mathematical methods used to determine the value of companies during the implementation of merger and acquisition agreements (M&A Transactions) are highlighted. The theoretical and practical aspects of the application of methods for assessing the value of companies in mergers and acquisitions are summarized, their essence is revealed, the differences between the methods are highlighted, indicating the special characteristics of these methods, the application criteria and the main prerequisites under which the use of each method will be most effective and give the best result are defined. Particular attention is paid to the disclosure of the advantages and disadvantages of each method of assessing the value of companies, which are used in accordance with the characteristics of gas companies in which mergers and acquisitions take place. Modern scientific works of domestic and foreign scientists, devoted to the application of mathematical methods of estimating the value of companies in merger and acquisition agreements, were studied. The methods of applying mathematical methods to calculate the value of companies-potential targets of mergers and acquisitions are clearly shown, namely the Discounted Cash Flow model (DCF), the Precedent Transactions Analysis (PTA), the Comparable Companies Analysis (CCA) and Machine Learning algorithms (ML). On the basis of the conducted research, promising directions for improving the research of mathematical methods and models for determining the value of companies in merger and acquisition agreements were determined.

Should One Assume the Discount Rate to Be One of the Risk Factors?

The Monte Carlo simulation is the ultimate solution for considering nearly all possible scenarios in presumably any discounted cash flow valuation. This paper argues that a discount rate expresses an investor’s current requirement and should be respectively perceived as a parameter only. The consequences of qualifying a required rate of return (a discount rate) as a risk factor in a discounted cash flow valuation are described in the paper using a free cash flow financial model of an asset being a hypothetical publicly traded enterprise. The case study is a discounted cash flow valuation using the Monte Carlo simulation for risk analysis. The various sets of assumptions are considered to explain the consequences of qualifying a required rate of return in a discounted cash flow model as a risk factor. As indicated in the paper, the discount rate as an additional risk factor with an attributed probability distribution increases the volatility of a risk variable, then the distribution of a risk variable becomes more flattened. In previous studies, some authors indicated that a discount rate could be considered a risk factor in the Monte Carlo simulation (Krysiak 2000; Damodaran 2018).

Analysis of Intrinsic Stock Value Based on Discounted Cash Flow (DCF) Model -- Take China Construction Bank (601939) as an Example

The DCF model is a simple and effective way to predict the intrinsic value of a stock by discounting future dividends. In this paper, China Construction Bank is used as the research object and valued by the DCF model [1]. The research results show that the current share price of China Construction Bank is undervalued, and with a large gap between the stock price seen by the public and the true intrinsic value of China Construction Bank, there is still plenty of room to go in the decades to come. so it is recommended to increase the stock to wait for future gains [2].

PP152 The Assessment Of The Price Of A Medicine: The Possible Application Of Cost-Based Pricing Methods

IntroductionBefore admission to the insured package, the price of a medicine is usually assessed on the basis of the value of the medicine for the patient: the effect size on health and survival must be in line with the costs. That seems like a fair starting point, but the use of such ‘value-driven’ models sometimes results in unrealistic prices. These prices in turn lead to discussions about limitations within the healthcare budget and may result in delays in the accessibility of medicines. The aim of this study was to review several alternative pricing models and propose possible applications of the models.MethodsSix pricing models were selected that encompassed cost-based or cost- and value-based aspects. The models were reviewed within the context of the published group of medicines, followed by a discussion on their potential to aid in creating benchmarks for pricing negotiations.ResultsFive cost-based pricing models and one value-based model with a cost-based aspect were found with potential applications. (i) The AIM-model for innovative medicines. (ii) The adjusted AIM-model for repurposed medicines. (iii) The Cancer drug pricing model for innovative oncolytics with information about health benefit. (iv) The discounted cash flow model for orphan medicines with information about health benefit. (v) The value-based rate of return pricing for innovative orphan medicines with information about health benefit. (vi) The P-quad model for drugs with a high budget impact for which there is no generic competition after intellectual property an regulatory exclusivity end.ConclusionsWe argue that it would be more logical for different categories of medicines to base prices on average costs, possibly combined with a bonus for innovation: the cost-based pricing method. The next step is to discuss the possible application of cost-plus methods with stakeholders including patients, industry, payers, and healthcare professionals.

Estimating the Market Value of Transferred Intangibles Using the Discounted Cash Flow Model

Discounted cash flow models of the fair market value of transferred intangible assets must rely on the estimated cash flows from the intangible asset over its economic useful life. Even if a reliable forecast of future sales and expenses from an enterprise were available, the representatives of the multinational must defend its assumptions with respect to the share of profits attributable to the transferred intangible, the economic useful life for the transferred intangible assets, and the appropriate discount rate. The IRS has challenged certain applications of this approach on the grounds that the representatives of the multinational have understated the share of profits attributable to the transferred intangible and the economic useful life while overstating the appropriate discount rate.