Part 2
“Discounted Cash Flow (DCF) as a capital investment appraisal tool suffers from a number of major limitations” (ADLER 2006, p.4)
This statement was made ten years ago- critically evaluate the relevance of the statement in today’s financial world indicating whether you agree or disagree with the statement made. Support your answer with relevant (appropriately referenced) peer review literature. (1500-2500 words)
Introduction
Discounted Cash Flow is a statistical analysis method to calculate the future value of an investment. It’s one of the most conventional method all over the world. In the modern era of economics (globalisation), the micro economics factors are influencing in property valuation, so complexity of valuation are increased. …show more content…
Moreover, the contemporary valuation theory established by Irving Fisher in his books-The rate of Interest (1907), and The Theory of Interest (1930). After the 1929 stock market crash generally people accepted DCF as a valuation method. However, the modern theory of DCF are introduced by John Burr Williams in his dissertation submitted in Harvard – title “The Theory of Investment Values” (1938). Joel Dean was interested in some ideas of Williams and add these in to his book “Capital Budgeting” published in 1951. Although, until now there’s not much research is done by the acceptance of this valuation method excepted of few. Baum and Crosby (2008;297) conclude their book with following “The models we favour appear to replace a tried and-tested conventional implicit-yield model with a dangerously subjective contemporary explicit cash-flow model, forcing the valuer into the hazardous science of forecasting. We hope we have demonstrated that this is not so”. Sayce,S., Smith etc. (2006;16) also states that “Until recently in the UK, however, DCF was considered to be an analytical tool and not a valuation tool” and “the variance in end results from those achieved through conventional methods has resulted in considerable resistance amongst some members of the valuer community”. Parker and Robinson …show more content…
This method is dynamic in its nature, also whose using this method need to be more careful. The DCF model is not much suitable for short term investing because it’s can’t predict an accreted value. It might be correct in long term investments. This method really based on with assumptions for cash flow, risks and values. The output completely related with the assumptions we choose. So if the input is wrong your DCF will be a blunder. In the terms of market price, it’s not a good method for valuation.in the case of a portfolio business projects, the real options are very difficult to put price. Because of this many analysists are rejecting DCF. It may undervalue the true value of
“Discounted Cash Flow (DCF) as a capital investment appraisal tool suffers from a number of major limitations” (ADLER 2006, p.4)
This statement was made ten years ago- critically evaluate the relevance of the statement in today’s financial world indicating whether you agree or disagree with the statement made. Support your answer with relevant (appropriately referenced) peer review literature. (1500-2500 words)
Introduction
Discounted Cash Flow is a statistical analysis method to calculate the future value of an investment. It’s one of the most conventional method all over the world. In the modern era of economics (globalisation), the micro economics factors are influencing in property valuation, so complexity of valuation are increased. …show more content…
Moreover, the contemporary valuation theory established by Irving Fisher in his books-The rate of Interest (1907), and The Theory of Interest (1930). After the 1929 stock market crash generally people accepted DCF as a valuation method. However, the modern theory of DCF are introduced by John Burr Williams in his dissertation submitted in Harvard – title “The Theory of Investment Values” (1938). Joel Dean was interested in some ideas of Williams and add these in to his book “Capital Budgeting” published in 1951. Although, until now there’s not much research is done by the acceptance of this valuation method excepted of few. Baum and Crosby (2008;297) conclude their book with following “The models we favour appear to replace a tried and-tested conventional implicit-yield model with a dangerously subjective contemporary explicit cash-flow model, forcing the valuer into the hazardous science of forecasting. We hope we have demonstrated that this is not so”. Sayce,S., Smith etc. (2006;16) also states that “Until recently in the UK, however, DCF was considered to be an analytical tool and not a valuation tool” and “the variance in end results from those achieved through conventional methods has resulted in considerable resistance amongst some members of the valuer community”. Parker and Robinson …show more content…
This method is dynamic in its nature, also whose using this method need to be more careful. The DCF model is not much suitable for short term investing because it’s can’t predict an accreted value. It might be correct in long term investments. This method really based on with assumptions for cash flow, risks and values. The output completely related with the assumptions we choose. So if the input is wrong your DCF will be a blunder. In the terms of market price, it’s not a good method for valuation.in the case of a portfolio business projects, the real options are very difficult to put price. Because of this many analysists are rejecting DCF. It may undervalue the true value of