Topic
Discounted cash flow
About: Discounted cash flow is a research topic. Over the lifetime, 2006 publications have been published within this topic receiving 31265 citations. The topic is also known as: DCF analysis & DCF.
Papers published on a yearly basis
Papers
More filters
TL;DR: In this article, the authors use contingent claims analysis to derive optimal decision rules and to value such investments, and determine the effects of time to build, opportunity cost and uncertainty on the investment decision.
784 citations
TL;DR: In this article, a methodology for the valuation of claims on a real asset: an offshore petroleum lease is presented. And the authors show the necessity of combining option pricing techniques with a model of equilibrium in the market for the underlying asset (petroleum reserves), emphasizing the advantages of this approach over conventional discounted cash flow techniques.
Abstract: This paper extends financial option theory by developing a methodology for the valuation of claims on a real asset: an offshore petroleum lease. Several theoretical and practical problems, not present in applying option pricing theory to financial assets, are addressed. Most importantly, we show the necessity of combining option pricing techniques with a model of equilibrium in the market for the underlying asset (petroleum reserves). The advantages of this approach over conventional discounted cash flow techniques are emphasized. The methodological development provides important insights for both company behavior and government policy. Promising empirical results are reported.
687 citations
TL;DR: This paper presents the first application of the Black-Scholes model that uses a real world business situation involving IT as its test bed, and makes the case for the generalizability of the approach it discusses to four IT investment settings.
Abstract: The application of fundamental option pricing models (OPMs), such as the binomial and the Black-Scholes models, to problems in information technology (IT) investment decision making have been the subject of some debate in the last few years. Prior research, for example, has made the case that pricing "real options" in real world operational and strategic settings offers the potential for useful insights in the evaluation of irreversible investments under uncertainty. However, most authors in the IS literature have made their cases using illustrative, rather than actual real world examples, and have always concluded with caveats and questions for future research about the applicability of such methods in practice. This paper makes three important contributions in this context: (1) it provides a formal theoretical grounding for the validity of the Black-Scholes option pricing model in the context of the spectrum of capital budgeting methods that might be employed to assess IT investments; (2) it shows why the assumptions of both the Black-Scholes and the binomial option pricing models place constraints on the range of IT investment situations that one can evaluate that are similar to those implied by traditional capital budgeting methods such as discounted cash flow analysis; and (3) it presents the first application of the Black-Scholes model that uses a real world business situation involving IT as its test bed. Our application focuses on an analysis of the timing of the deployment of point-of-sale (POS) debit services by the Yankee 24 shared electronic banking network of New England. This application enables us to make the case for the generalizability of the approach we discuss to four IT investment settings.
500 citations
TL;DR: In this paper, the authors compared the market value of highly leveraged transactions to the discounted value of their corresponding cash flow forecasts, and found that the valuations of discounted cash flow forecast are within 10 percent, on average, of the market values of the completed transactions.
Abstract: This article compares the market value of highly leveraged transactions (HLTs) to the discounted value of their corresponding cash flow forecasts. For our sample of 51 HLTs completed between 1983 and 1989, the valuations of discounted cash flow forecasts are within 10 percent, on average, of the market values of the completed transactions. Our valuations perform at least as well as valuation methods using comparable companies and transactions. We also invert our analysis by estimating the risk premia implied by transaction values and forecast cash flows, and relating those risk premia to firm and industry betas, firm size, and firm book-to-market ratios.
429 citations
TL;DR: In this paper, the authors present expressions for the market value of a long-lived capital investment project, assuming that the capital asset pricing model (CAPM) holds in each period.
Abstract: THIS PAPER DERIVES and presents expressions for the market value of a long-lived capital investment project, assuming that the capital asset pricing model (CAPM) holds in each period. We use these expressions to examine the determinants of beta and to evaluate traditional capital budgeting procedures based on the discounted cash flow formula and the opportunity cost of capital. The good news is that it is possible to value capital investments using relatively simple formulas derived from the CAPM. Also, the traditional procedures give close-to-correct answers, provided that the right asset beta is used to calculate the discount rate. The bad news is that the right asset beta depends on project life, the growth trend of expected cash flows, and other variables which are not usually considered important in assessing business risk. Moreover, for growth firms the right discount rate cannot be inferred from the observed systematic risk of the firm's stock, even if the firm invests only in projects of a single risk class. The reason is that growth opportunities affect observed systematic risk.
315 citations