Cash flows and likely distribution of values Case Solution
Description of other valuations approaches including results
It is a mining project having many consequences of the wrong decision on the earnings. However, while valuing the company, some assumptions were made to continue the valuation processes. Following are the assumptions:
- Data of the project was given for 3 years only, however the data was extended up to the 12 years to get the fair value of the company. Only 3 years’ data would not have given fair value of the project, thus, it was necessary to extend the years to approach the fair value of the project.
- A discount rate is the rate at which the future cash inflow of the company is discounted to get the fair value of the project. However, if the cumulative value of the cash inflows after discount does compensate the initial cost of the project, then the project is accepted, and if the cumulative value of the company after discount does not compensate cost associated with project, then the project is rejected. This is because it would not meet with the expectation of the investors, and would not be attractive to accept the project.
- NPV method was used to value the project, as this method is used to value the project based on the its future cash inflows. However, other valuation methods could have been used to value the project. e.g. Discounted cash flow model. Nonetheless, discounted cash flow model is used to value the company completely by determining the numerous factors, and weighted average cost of capital (WACC). On the other hand, WACC is a minimum required rate of the return expected by the investors to earn from the company’s operations.
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