Financial Performance

5

Valuation: principles and methods

The value of any asset, tangible or intangible, commercial, industrial or financial, is the present value of the expected stream of cash flows from this asset at the cost of capital.

The formula is therefore:

$V=\frac{C{F}_1}{\left(1+k\right)}+\frac{C{F}_2}{{\left(1+k\right)}^2}+\dots +\frac{C{F}_{\mathrm{n}}}{{\left(1+k\right)}^n}$

  (1)

in which

• CF are the cash flows available to the investors (shareholders and lenders) who financed the asset;

• k is the opportunity cost of capital. This is the return that investors can get from alternative investments in the same risk class as the asset (see Chapter 4);

• n is the expected economic life of the asset.

5.1 The basic discounted cash flow (DCF) approach: a simple example ...