Banks management
Value a firm using Discounted Cash Flow approach. Assume the small business forecasted the following information for the next 5 years and the interest rate is 5%
Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | |
Cash Inflow | 5 million SAR | 1 million SAR | 3 million SAR | 6 million SAR | 7 million SAR |
Cash Outflow | 5 million SAR | 3 million SAR | 3 million SAR | 2 million SAR | 2 million SAR |
1- What is value of the firm using DCF approach?
2- If you work as financial analyst for a private equity, would you recommend financing for this small business? Why?
Homework Answers
DCF = Net CashCash flow (i)/( 1 + Interest rate)^ no of periods (i)
Net Cash flow = Cash inflow - Cash outflow
Interest rate = 5% given in the question
No of periods is the year before which cash flow occurs
| Value in Million SAR | |||||
| Year | 1 | 2 | 3 | 4 | 5 |
| cash inflow | 5 | 1 | 3 | 6 | 7 |
| Cash Outflow | 5 | 3 | 3 | 2 | 2 |
| present value Formula | 5/(1+0.05)^1 | 3/(1+0.05)^2 | 0/(1+0.05)^3 | 4/(1+0.05)^4 | 5/(1+0.05)^5 |
| Net Cashflow | 0 | -2 | 0 | 4 | 5 |
| Present value of the cash flow | 0 | -1.814058957 | 0 | 3.290809899 | 3.917630832 |
Net present value today is the sum of all discounted cash flows
so DCF value comes out to be 5.39 million SAR which is the value of the firm.
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