Discounted Cash Flow Techniques Research Articles

Economic Feasibility Analysis of Processing of Sesame (Edible Oil) in Northern Telangana Zone

Sesame is an ancient crop and is often called as Queen of seeds. Sesame oil is consumed from ancient times for its extensive health benefits. The study was aimed to analyze financial feasibility of processing of sesame to sesame edible oil in Northern Telangana Zone of Telangana state where sesame is produced extensively. The data was collected from three districts from NTZ where sesame is grown extensively. Random sampling method is used to select the sesame processors in the study area. The data has been collected from 30 sesame processors from three districts through pre schedules. The data was analysed by using discounted cash flow techniques involving Internal Rate of Return (IRR), Net Present Worth (NPW), Benefit cost Ratio (BCR) were employed.
 Result: The Net Present Worth of the processing units in the study area was positive and the results revealed that the sesame processing units higher IRR (30.33) and BCR (1.60) greater than one. The study showed that sesame processing units in the study area are financially feasible and profitable. The study suggests to increase awareness about the consumption and health benefits of using sesame oil in the study area.

Changing tenant covenant perceptions and flexibility in the lease model in UK city centres

ABSTRACT The retailing industry in the UK is experiencing unprecedented structural change. The impact on retailers has often dominated headlines, along with the impacts on local services and economies, but with little attention given to the implications for property owners and practitioners. Exploring and understanding the responsiveness of landlords, and their behaviours, is essential to understanding the adaptiveness of a retailing system. This study employs semi-structured interviews to examine the short- and long-term changes in the retail market and the actions of landlords in response. The findings span the period prior to and during the first year of the Covid-19 pandemic in 2020, and reveal that fundamental changes have occurred to establish tenant covenant norms and the traditional retail leasing model. The paper explores these changes, including a shift in tenant risk, reposition of the leasing model in favour of tenants, generally, and greater application of turnover rents. The pressing challenge for current valuation practitioners, therefore, is to incorporate these fundamental changes within the market into the pricing of retail assets. Significant progress in this area to date, as explored in the paper, has been limited although greater application of discounted cashflow techniques is set to be encouraged by the RICS.

Capital budgeting practices and political risk: evidence from Lebanon

PurposeThis paper aims to examine how capital investment projects are appraised in Lebanon; whether the risk is incorporated into this process by Lebanese firms and the impact of political risk on the capital budgeting process.Design/methodology/approachThis paper uses a questionnaire survey to investigate the capital budgeting practices of companies located in Lebanon, which is a country characterised by a high level of political risk.FindingsLebanese companies tend to use more than one method of investment appraisal and, increasingly, they are using sophisticated discounted cashflow techniques alongside the payback period. The most widely used methods to evaluate risk include scenario and sensitivity analysis. Finally, political risk plays an important role in the capital budgeting processes of Lebanese companies.Originality/valueThe paper reports on whether the methods of capital investment appraisal used throughout advanced Western economies are used in the context of an emerging economy. In addition, Lebanon is an ideal research site to study capital budgeting as the conflicts in the country of the past 50 years have required sizeable new expenditure on capital projects; the country is characterised by high levels of political risk which may lead corporate managers to use different approaches to investment appraisal and it provides an opportunity to study capital budgeting decisions by private, unlisted firms.

Utilization of Investment Appraisal Techniques by Large-Scale Businesses in Lagos State, Nigeria

The study was carried out to investigate the utilization of investment appraisal techniques by large-scale businesses in Lagos State. Two research questions guided the study. The study adopted descriptive survey research design. The population for the study was 150 portfolio managers of large-scale businesses (both banking and insurance organizations) from the three senatorial zones of Lagos State. Due to the manageable size of the population, the entire 150 portfolio managers were involved in the study; therefore, there was no sampling. The instrument for data collection was a well structured 30-item questionnaire. The questionnaire was face validated by three experts. The data for the study was collected by the researcher with the help of three well trained research assistants. The data collected for the study was analyzed using mean and standard deviation for answering the research questions while t-test statistics and Analysis of Variance (ANOVA) were used for testing the hypothesis. Based on the data analyzed, the findings of the study showed that portfolio managers of large-scale businesses in Lagos State were not adequately utilizing non-discounted and discounted cash flow techniques analysis approaches for their investment appraisal in the State. Based on the findings, the study recommended that adequate and effective utilization of investment appraisal techniques should be ensured by management of large-scale businesses such as banks and insurance companies for economic success of the sub-sector and that Portfolio managers of businesses should be continuously made to undergo in-service training in investment appraisal techniques for proficiency on their jobs.

Socio-economic impacts of the adoption of MIS (Micro-irrigation system) among small and marginal farmers of Coimbatore district, India

Considerable attention has been given to micro-irrigation technologies by policymakers to help farmers in overcoming water scarcity problems. In this paper, the potential impacts of MIS on farmers’ livelihood and economic viability of using drip in banana cultivation were analyzed using discounted cash flow techniques. The study focused on small and marginal farmers of Coimbatore district of Tamil Nadu as they were provided with 100% subsidy. Adoption of MIS increased the total cropped area (6.54%), extended area under irrigation (6.55%), increased cropping intensity (69.19%) and irrigation intensity (70.95%). Investment on drip irrigation system by farmers were found financially feasible (NPV Rs.43,851.16, BCR 1.42 and IRR 30.88%). The study also brought out the constraints faced by farmers in the adoption of MIS such as lack of technical support, the inefficiency of the system with poor quality water and damage caused by animals. The research work would be helpful in understanding the advantages of using MIS by small and marginal farmers and problems encountered by them in adoption even though the investment was economically viable.

Financial Management Practices, Firm Growth and Profitability of Small and Medium Scale Enterprises (SMEs)

The study examined financial management practices using four components: working capital management practices, capital structure management, accounting information and financial reporting practice, and the use of capital budgeting techniques and fixed assets management. Performance of SMEs was examined from the context of profitability measured by Return on Assets and of growth. The study sampled 100 SMEs from Accra with data collected through the administration of a questionnaire. Data were analysed using descriptive statistics and Pearson correlation analysis. The results of the descriptive statistics revealed that working capital management practices had the highest mean score, followed by accounting information and financial reporting practices, capital structure management and finally, the use of capital budgeting techniques and fixed assets management, in that order. The Pearson correlation analysis showed a positive association between the four components of financial management practices and between SMEs profitability and growth. The results emphasize the need for SMEs to improve on their financial management practice to improve the profitability and growth of these firms. It is recommended that the use of capital budgeting techniques be improved, as this area of financial management, even though it impacts positively on the performance of SMEs had the least score. Most importantly, the managers of SMEs should use discounted cash flow techniques to evaluate investment and projects before committing the resources of the company. SMEs are encouraged to adopt IFRS for SMEs to enhance their financial reporting practices. This will also improve their decision making and access to capital which will allow these SMEs to expand.

Adoption of switchgrass cultivation for biofuel under uncertainty: A discrete-time modeling approach

Production of biofuels from cellulosic sources, such as switchgrass, is being encouraged through mandates, incentives, and subsidies. However, uncertainty in future prices coupled with large establishment costs often inhibit their cultivation. Owing to their inability to incorporate uncertainty and dynamic decision-making, standard discounted cash flow techniques are ineffective for analyzing such investments. We formulate a discrete-time binomial framework to model output prices, allowing us to incorporate price uncertainty, stand age, and variable crop yields into the analytical framework. We analyze the feasibility of investments in switchgrass cultivation under varying price transition paths, evaluate the relationship between risk and profitability, and estimate the value of flexible decision-making options wherein the farmer can alter cultivation choices. We find that switchgrass cultivation is only 32% likely to be profitable in the base model and infer that on-farm management could play an important role in entry and exit decisions. We also find that subsidies are important for project viability and policymakers could consider incorporating payments for ecosystem services to encourage adoption.

Capital budgeting practices in Indian companies

The volatility of the global economy, changing business practices, and academic developments have created a need to re-examine Indian corporate capital budgeting practices. Our research is based on a sample of 77 Indian companies listed on the Bombay Stock Exchange. Results reveal that corporate practitioners largely follow the capital budgeting practices proposed by academic theory. Discounted cash flow techniques of net present value and internal rate of return and risk adjusted sensitivity analysis are most popular. Weighted average cost of capital as cost of capital is most favoured. Nevertheless, the theory-practice gap remains in adoption of specialised techniques of real options, modified internal rate of return (MIRR), and simulation. Non-financial criteria are also given due consideration in project selection.

Probabilistic life-cycle cost analysis for renewable and non-renewable power plants

Two probabilistic models are presented to assess the costs of power plants. One of them uses requirement trees, value functions and the analytic hierarchy process. It is also based on Monte Carlo simulation. The second one is a mathematical model for calculating the levelised cost of electricity (LCOE) based on discounted cash flow techniques, and combined with Monte Carlo simulation. The results obtained with both models are compared and discussed. On the one hand, the LCOE model provides the most reliable results. These results reinforce the idea that conventional or coal, lignite, oil, natural gas and nuclear power plants are still the most competitive options, with the LCOE falling in a range of around 25 to 200 €/MWh and mean values approaching 70 €/MWh. Generally, renewable power plants obtained the worst results, with a LCOE varying from around 30 to more than 450 €/MWh. Nevertheless, this study demonstrates that renewable alternatives can compete with their conventional counterparts under certain conditions.

The Capital Budgeting Process of Healthcare Organizations: A Review of Surveys

Several surveys have been administered over the last 40 plus years to learn about capital budgeting practices of healthcare organizations. In this report, we analyze and synthesize these surveys in a four-stage framework of the capital budgeting process: identification, development, selections, and post-audit. We examine three issues in particular: (1) efficiency of for-profit hospitals relative to not-for-profit hospitals, (2) capital budgeting practices of the healthcare industry vis-à-vis other industries, and (3) effects of healthcare mergers and acquisitions on capital budgeting decisions. We found indirect evidence that for-profit hospitals exhibited greater efficiency than not-for-profit hospitals in recent years. The acquisition of not-for-profits by for-profits is credited as the primary reason for growth of multihospital systems; these acquisitions may have contributed to the more efficient capital budgeting practices. One unique attribute of healthcare is the dominant role of physicians in almost all aspects of the capital budgeting process. In agreement with some researchers, we conclude that the disproportionate influence of physicians is likely to impede efficient decision making in capital budgeting, especially for nonprofit organizations.

Capital budgeting practices: an empirical study of listed small en medium enterprises

There have been many studies on the capital budgeting practices of large listed companies, but relatively little research has been undertaken on the capital budgeting practices of small listed companies. The main purpose of this study was therefore to analyse the capital budgeting practices of small and medium South African listed companies and to compare their capital budgeting practices to the capital budgeting practices of large listed companies. The results of the study indicate that the primary capital budgeting techniques employed by small listed companies are based on the IRR and the NPV, resembling the practices used by larger companies. Furthermore, the use of discounted cash flow techniques amongst small listed companies had increased over the last decade.

Issues in real options with shadow costs of incomplete information and short sales

This paper presents the valuation of real options and the capital budgeting models within shadow costs of incomplete Information and short sales. Shadow costs are sunk costs in the spirit of Merton's (1987) model of capital market equilibrium with incomplete information.The shadow cost includes two components. The first component is the product of pure information cost due to imperfect knowledge and heterogeneous expectations. The second component represents the additional cost caused by the short-selling constraint. Information costs are linked to Merton's (1987) model of capital market equilibrium with incomplete information, CAPMI. This model is extended by Wu, Li and Wei (1996) who propose an incomplete-information capital market equilibrium with heterogeneous expectations and short sale restrictions, GCAPM. This model is used in our paper to provide for the first time in the literature analytic solutions for derivatives in the presence of both shadow costs of incomplete information and short sales.Shadow costs are used in standard discounted cash flow techniques and real options. The justification of shadow costs in real projects is based on the observation that R&D needs to be done before investment decisions. The main results regarding real options and shadow costs of incomplete information and short sales are proposed by extending the analysis in Bellalah (1999, 2000) and Bellalah and Wu (2009).Our results have important implications in terms of pricing derivative assets and different types of real options. In particular, this framework can be easily implemented in investment decisions and the valuation of flexibility embedded in real projects. In fact, several investment decisions under uncertainty can be reformulated and their results can be implemented in the presence of incomplete information and investment constraints.

Optimization of the Passive Recovery of Uranium from Seawater

The aim of this study is to optimize the design and deployment conditions utilized by a technology for passively collecting uranium from seawater in order to achieve the minimum uranium production cost. Given the complicated empirically driven nature of the cost calculation, which uses discounted cash flow techniques to follow the life cycle costs of a unit mass of adsorbent, the cost calculation tool is treated as a black box model, and thus the minimization employs a derivative free optimization method, chosen to be the Nelder–Mead simplex method. By use of an illustrative base case, the uranium production cost is minimized, resulting in a 20% savings. From there, sensitivity analyses are considered in order to provide insight as to how the optimal deployment conditions are determined and to shed light on significant cost drivers. It is determined that optimizing the deployment conditions and improving the uranium binding kinetics can significantly decrease production cost. The results presented in this...

Economic assessment of oil palm projects in Nigeria.

Due to the dramatic increase in the incidence and severity of poverty in Nigeria arising from the dwindling performance of the agricultural sector where a preponderant majority of the poor are employed, the revenue from the farmer’s output is of paramount importance in order to maintain continuous cycle of production. However, this study was designed to economically assess oil palm projects in Nigeria. Secondary data used for this study were collected from Nigerian Institute for Oil Palm Research (NIFOR) and related journals. The data collected were analyzed using discounted cash flow techniques. The result shows that at 32% interest rate NPV was positive (N20,275), IRR was 33% and the BCR was 1.06. The sensitivity analysis revealed that at 5% fall in revenue of the project, the NPV was positive (N1,403) while at 10% fall in revenue, the NPV became negative (N-28,747). Therefore, since price and yield quantity is an important ingredient in determining the revenue from oil palm project, investor has to watch closely these variables that may affect the profitability of the project.Keywords: Oil palm, NPV, IRR, BCR, discount factor.

A review of the case for modern-day adoption of hydraulic air compressors

Despite 18 reported commercial large scale deployment cases of hydraulic air compressors (HACs), the technology has fallen into demise. This paper opens by explaining that many of the reasons for this are no longer relevant in a modern context. The operating principles of HACs are reviewed and a hydrodynamic formulation is outlined so that HAC performance can be assessed by means of simulation. Simulation results confirm that HACs practically offer a close-to-isothermal gas compression and so still offer large scale gas compression utility with lower energy consumption in comparison to modern-day compression plant, even if decoupled from their opportunistic utilization of natural hydropower resources. Failure to properly account for the pressure solubility of gases in water leads to the erroneously high estimates of around 83% for the HAC mechanical efficiency for the two largest HACs built, at Victoria, MI, USA and at Ragged Chutes, ON, Canada. While still remaining only weakly coupled to the hydrodynamic simulator, simulations based on reported performance of the historical HACs, that now account for gas solubility, result in downward revision of mechanical efficiency to around 64%. Simulation results further indicate that for HACs where water is recirculated, mechanical efficiencies may be able to be increased from the new, lower estimates by i) prior solution of a salt in the circulating water or ii) increasing the temperature of HAC operation. Both measures have the effect of reducing gas solubility and hence increasing compressed air yield. An examination of the modern day economic case for HAC technology using discounted cash flow techniques concludes that they may be able to compete economically with large scale multi-stage centrifugal compressors. Two new potential application areas for HACs are presented. Firstly a deep mine ventilation air cooling concept is explained and secondly, gas solubility, that hitherto has proved problematic for HACs, is turned to advantage in a carbon capture concept.

Building a scenario based active mapping investment tool within a physical asset management framework

This study explores the implementation of an integrated capital budgeting visual mapping framework comprised of both Discounted Cash Flow (DCF) and Real Options Analysis (ROA) techniques. Physical asset investment decisions are based largely on rigid discounted cash flow tools which provide untimely and incomplete decisional criteria. While literature outlines the widespread use of traditional DCF techniques, it nevertheless reveals extensive limitations, including its static inflexibility and slow-to-evolve framework. ROA is a more recent valuation tool based on stock option theory. It brings into account added value found in the flexibility of managerial decision-making and uncertain conditions. This study implements a combined DCF and ROA capital budgeting tool within a Physical Asset Management (PAM) environment. The validity of the framework is realised through an industry-relevant case study presented by a South African mining company.

Real option analysis for environmental compliance: LNG and emission control areas

A wide array of technical and operational solutions is available to shipowners in order to comply with existing and upcoming environmental regulation within Emission Control Areas (ECAs). Liquefied Natural Gas (LNG) is a promising alternative since it offers potential cost savings in addition to ensuring compliance with ECA regulation. But investment to retrofit existing vessels to be able to use LNG carries significant upfront costs, and a high degree of uncertainty remains on the differential between the prices of LNG and conventional maritime fuels, as well as on the availability of LNG and the reliability of its supply chain. New technologies such as LNG inherently carry substantial risk and an ill-chosen investment strategy may have irreversible consequences that could jeopardise the future of the shipping company. One important question is whether interested owners should invest in LNG now to comply with ECA rules in 2015 and reap the benefits of lower LNG prices, or whether it would be advisable to wait until some of the uncertainty is resolved.While traditional discounted cash flow techniques are unable to account for the value of managerial flexibility linked, for example, to the possibility of deferring an investment, real option analysis can be used to analyse such cases. The paper discusses the optimal time for investment in LNG retrofit and takes specific account of the value of an investment deferral strategy versus the advantages obtainable from the immediate exploitation of fuel price differentials. Through the use of a real option model the paper shows that there is a trade-off between low fuel prices and capital expenses for investment in LNG retrofit. The development in LNG is critically dependent on its future price as well as the reduction in capital costs and ship retrofitting costs. In this respect, policy makers can play a critical role in providing support to advance technical knowledge, maintain LNG prices at favourable levels and in avoiding ambiguity on regulation.

Islamic perspective of management accounting decision making techniques

Purpose – This paper aims to argue that the methodologies adopted by the conventional management accounting in selecting between or among two or more alternative courses of action, both in the long-term and the short-term decision making endeavours conflict with the overall objective ( falah) of Islamic enterprises. Design/methodology/approach – The paper explores relevant literatures (including the Qur'an and the Hadeeth) to ascertain the objective of an Islamic enterprise and suggest an alternative approach, in making a choice among alternative courses of action, that aligns with the Islamic socio-economic objective ( falah). Findings – The paper suggests that both in long-term and short-term decision making endeavours, cost-benefit comparison (where cost includes negative externalities) rather than discounted cashflow techniques or contribution margin should be adopted in making a final choice among alternatives to achieve falah. Research limitations/implications – The paper has not considered other objectives that may be pursued by an organisation beside profit maximization whether short-term or long-term. Practical implications – The paper expands the frontiers of knowledge in Islamic accounting by exposing the inadequacy of the conventional management accounting decision making methods. Originality/value – This paper explores the Islamic perspective of the conventional management accounting which is rare among scholars of accounting.

Value maximizing maintenance policies under general repair

One class of maintenance optimization problems considers the notion of general repair maintenance policies where systems are repaired or replaced on failure. In each case the optimality is based on minimizing the total maintenance cost of the system. These cost-centric optimizations ignore the value dimension of maintenance and can lead to maintenance strategies that do not maximize system value. This paper applies these ideas to the general repair optimization problem using a semi-Markov decision process, discounted cash flow techniques, and dynamic programming to identify the value-optimal actions for any given time and system condition. The impact of several parameters on maintenance strategy, such as operating cost and revenue, system failure characteristics, repair and replacement costs, and the planning time horizon, is explored.This approach provides a quantitative basis on which to base maintenance strategy decisions that contribute to system value. These decisions are different from those suggested by traditional cost-based approaches. The results show (1) how the optimal action for a given time and condition changes as replacement and repair costs change, and identifies the point at which these costs become too high for profitable system operation; (2) that for shorter planning horizons it is better to repair, since there is no time to reap the benefits of increased operating profit and reliability; (3) how the value-optimal maintenance policy is affected by the system's failure characteristics, and hence whether it is worthwhile to invest in higher reliability; and (4) the impact of the repair level on the optimal maintenance policy.

Capital Budgeting for Information Systems Investments – Evidence from Kenya

This article explores the use of capital budgeting techniques to appraise Information Systems (IS) investments in commercial banks in Kenya. Results of the survey of 25 banks show that the level of usage of simple ratio-based techniques such as cost benefit analysis (CBA), payback period and return on investment (ROI) to appraise IS investments is very high compared to the use of discounted cash flow (DCF) techniques such as net present value (NPV) and internal rate of return (IRR). These findings confirm the existence of a gap between theoretically correct investment appraisal practices that lay emphasis on the use of DCF techniques, and practice.