Investment appraisal under uncertainty - Coursework Example

work, Finance and Accounting Investment Appraisal under Uncertainty Table for Cash Flows TWO STAGE DISCOUNTING CASH FLOWInitial Cash Flow$100,000,000 Years:1 - 34 - 6Rate of Growth10%10% Final Growth Rate:1%Discounting Rate:15%Outstanding Shares :10,000,000 Safety Margin:30%Level of Debts:$0 Pay Back YearFlowsGrowthValue1110,000,000 10%$95,652,174 2121,000,000 10%$91,493,384 3133,100,000 10%$87,515,411 4145,813,619 10%$83,369,410 5159,741,634 10%$79,419,824 6175,000,043 10%$75,657,348 Terminal Year NPV$1,750,000 PV of Yr 1 to 6 Cash Flows:$513,107,550 Terminal Value:$5,404,096 Total Cash Flow PVs:$518,511,646 NO of Shares10,000,000 Intrinsic Value:$51.

85 Intrinsic Value Safety Margin$36.30 % age Intrinsic Value from the Terminal Value1%Table 1: Cash Flow DiscountingReasons for ReluctanceOne of the reasons for being reluctant in decision-making on the investment is the uncertainties related to the discounting of cash flows. Discounting implies that the future cash flows of the company have been discounted back to its current position to determine the company’s valuation. The Discounting Cash Flow Model is not reliable as a perfect tool for valuation because it is practically not able to predict the growth rate of the company’s cash flows.

However, it can give an estimate of the value of the company in combination with other parameters.Secondly, reluctance to invest is justifiable because it compels the user to keep in mind the Intrinsic Value of the investment. Intrinsic value is merely a numbers introduced into this model. It is possible for one to assume unrealistic terminal value based on overstated or understated growth rates. According to Nitzan and Bichler (2009), this generates unrealistic intrinsic value outcomes.The third reason for reluctance is the Limitations of Discounting Cash Flow Model in relation to the payback period.

It can only function for a limited number of years, suitably, 5-year time payback period. Again, it cannot function if the growth rate is higher than the discounting rate (Nitzan & Bichler, 2009).ReferencesNitzan, J. & Bichler, S. (2009), Capital as Power. A Study of Order and Creorder., RIPE Series in Global Political Economy, New York and London: Routledge.