Small company economics–net present value versus net cash flow

2011 ◽  
Vol 51 (1) ◽  
pp. 369
Author(s):  
Michael Scott
Keyword(s):  
Cash Flow ◽  
Net Present Value ◽  
Small Company ◽  
Present Value ◽  
Term Survival ◽  
Oil Companies ◽  
Project Valuation ◽  
Company Directors ◽  
Exploration Drilling ◽  
Positive Cash Flow

This paper is primarily written for the benefit of the small company that survives hand-to-mouth on a day-to-day basis. Personnel working in large profitable oil companies that spin off lots of positive cash flow may have difficulty empathising with the example. Net present value is a commonly accepted method of project valuation. Globally, projects are valued, ranked, justified, bought and sold using this technique. For all companies, however, cash is considered to be king. Cash funds exploration activities and corporate costs and allows companies to continue trading without returning to shareholders for additional funds. Both the solvency of the company and the dilution of share value are extremely important considerations for company directors. For a small company with income being generated from a single small field, an example is presented where a simple decision is considered: keep the field and live off the annual income or sell the field and live off the declining balance. This is an extremely simple example used to demonstrate the power of cash flow. No alternative investment is available and no exploration success from continued exploration drilling is experienced–the directors are only focused on funding the company’s ongoing obligations. The conclusion from the analysis is that cash flow from a project may be preferred over selling a project for net present value and then funding the company’s obligations from the proceeds of the sale and declining funds balance. The ultimate lesson for companies is that cash flow, however insignificant, can greatly increase their chances of long-term survival.

TINJAUAN STUDI KELAYAKAN USAHA BADAN USAHA MILIK DESA (NAGARI) KAMANG HILIA SEJAHTERA KENAGARIAN KAMANG HILIA, KECAMATAN KAMANG MAGEK, KABUPATEN AGAM, PROVINSI SUMATERA BARAT

2018 ◽  
Vol 3 (2) ◽  
pp. 160
Author(s):  
Halkadri Fitra ◽  
Salma Taqwa ◽  
Charoline Cheisviyanny ◽  
Abel Tasman ◽  
Nurzi Sebrina
Keyword(s):  
Cash Flow ◽  
Net Present Value ◽  
Average Rate ◽  
Flow Analysis ◽  
Payback Period ◽  
Rate Of Return ◽  
Internal Rate Of Return ◽  
Present Value ◽  
Internal Rate

Penelitian ini bertujuan untuk melihat kelayakan aspek keuangan usaha grosir sembako Badan Usaha Milik Desa (Nagari) Kamang Hilia Sejahtera di Kenagarian Kamang Hilia Kecamatan Kamang Magek Kabupaten Agam Provinsi Sumatera Barat yang dilakukan pada tahun 2018. Penelitian bersifat deskriptif kuantitatif dengan menggunakan metode cash flow analysis, payback period, net present value, profitability index, internal rate of return, dan average rate of return. Hasil penelitian menunjukkan bahwa nilai net cash flow Badan Usaha Milik Desa (Nagari) Kamang Hilia Sejahtera adalah positif yaitu Rp.21.774.000, nilai payback period adalah 1,15 tahun, nilai net present value positif sebesar Rp.10.680.034,47, nilai profitability index adalah positif 1,37, sedangkan nilai internal rate of return adalah 46,7% dan nilai average rate of return adalah 57,23%. Berdasarkan standar penilaian maka semua metode yang digunakan memberikan kesimpulan bahwa usaha grosir sembako milik Badan Usaha Milik Desa (Nagari) Kamang Hilia Sejahtera dalam kategori layak untuk dilaksanakan.

AN HISTORICAL PERSPECTIVE OF NET PRESENT VALUE AND EQUIVALENT ANNUAL COST

1982 ◽  
Vol 9 (1) ◽  
pp. 103-110 ◽  
Author(s):  
Thomas W. Jones ◽  
David Smith
Keyword(s):  
Cash Flow ◽  
Annual Cost ◽  
Historical Development ◽  
Historical Perspective ◽  
Net Present Value ◽  
Present Value ◽  
Discounted Cash Flow

Net present value and equivalent annual cost are two discounted cash flow criteria for comparing investment proposals. Why have accountants taken to net present value? Why do engineers readily use equivalent annual cost? This paper investigates the historical development of these principles to provide an explanation of why this is so.

Real Option Methodology for the Evaluation of IT Projects

2007 ◽  
Vol 8 (1) ◽  
pp. 71-88
Author(s):  
Efthymios Papadopoulos ◽  
Georgios Dounias
Keyword(s):  
Real Option ◽  
Net Present Value ◽  
New Technology ◽  
Full Range ◽  
Present Value ◽  
It Projects ◽  
Innovative Strategy ◽  
Technology Deployment ◽  
Project Valuation ◽  
Project Risks

Current project valuation framework under the Net Present Value (NPV) method has been proved to be incomplete, as it fails to accurately account for uncertainty. Traditional financial tools fail because they neglect to account for the value of flexibility. The standard NPV approach assumes that project risks remain constant over the life of the strategy. It, also, fails to factor in the full range of opportunities that a new and innovative strategy may create for a firm in the future. We show how one can use Real Option methodology in order to determine optimal financial path to fund new technology deployment within a risky environment. Moreover, in this paper we demonstrate, with the use of a simple numerical example, how the Real Options methodology can be implemented within an IT project deployment.

Value-Creating Investment Strategies to Manage Risk From Structural Market Uncertainties: Switching and Compound Options in (V)HTR Technologies

2008 ◽  
Author(s):  
Ulrike La¨uferts ◽  
Charlotte Halbe ◽  
Aliki van Heek
Keyword(s):  
Cash Flow ◽  
Discount Rate ◽  
Real Option ◽  
Net Present Value ◽  
Energy Markets ◽  
Present Value ◽  
Technology Investment ◽  
Compound Options ◽  
Managerial Flexibility ◽  
Strategic Value

To measure the value of a technology investment under uncertainty with standard techniques like net present value (NPV) or return on investment (ROI) will often uncover the difficulty to present convincing business case. Projected cash flows are inefficient or the discount rate chosen to compensate for the risk is so high, that it is disagreeable to the investor’s requirements. Decision making and feasibility studies have to look beyond traditional analysis to reveal the strategic value of a technology investment. Here, a Real Option Analysis (ROA) offers a powerful alternative to standard discounted cash-flow (DCF) methodology by risk-adjusting the cash flow along the decision path rather than risk adjusting the discount rate. Within the GEN IV initiative attention is brought not only towards better sustainability, but also to broader industrial application and improved financing. Especially the HTR design is full of strategic optionalities: The high temperature output facilitates penetration into other non-electricity energy markets like industrial process heat applications and the hydrogen market. The flexibility to switch output in markets with multi-source uncertainties reduces downside risk and creates an additional value of over 50% with regard to the Net Present Value without flexibility. The supplement value of deploying a modular (V)HTR design adds over 100% to the project value using real option evaluation tools. Focus of this paper was to quantify the strategic value that comes along a) with the modular design; a design that offers managerial flexibility adapting a step-by-step investment strategy to the actual market demand and b) with the option to switch between two modes of operation, namely electricity and hydrogen production. We will demonstrate that the effect of uncertain electricity prices can be dampened down with a modular HTR design. By using a real option approach, we view the project as a series of compound options — each option depending on the exercise of those that preceded it. At each end of the design phase, the viability will be reviewed conditional on the operating spread at each time step. We quantify the value of being able to wait with the investment into a next block until market conditions are favourable and to be able to abandon one block if market conditions are disapproving. To derive the intrinsic value of this multi block HTR design, it will be compared with a reference investment of a full commitment light water reactor without any managerial flexibility. In another case, we raise the question to what extent product output diversification is a suitable strategy to cope with long term market uncertainty in electricity price. What is the value of a multi-potent technology that is able to produce output for energy markets others than the electricity market? To investigate this, we concentrate on The Netherlands, a country with an intense industrial demand in electricity and hydrogen.

Maintenance Decisions for Offshore Structures Using Real Options Theory

2004 ◽  
Author(s):  
Ernesto Heredia-Zavoni ◽  
Sandra Santa-Cruz
Keyword(s):  
Decision Making ◽  
Real Options ◽  
Cash Flow ◽  
Net Present Value ◽  
Offshore Structures ◽  
Present Value ◽  
Real Options Theory ◽  
Financial Variables ◽  
Maintenance Decisions ◽  
Options Theory

Real Options methods are currently used to assess investment projects considering: (1) the decision options that one can have along the development of the project, such as to expand it, or reduce it, or to abandon it, or to differ it, and (2) the uncertainty in some financial variables for the assessment of the economic investment. In these two regards, Real Options methods are superior to the traditional Net Present Value method. The purpose of the present paper is to establish the basis for Real Options modeling for decision making on design, inspection, maintenance, and decommissioning of offshore structures. The use of Real Options theory is sought in order to account for: (1) uncertainties in the financial variables involved in risk assessment based on expected costs, such as the economic consequences due to failure of a system; and (2) uncertainties associated with the resistance and loading of the structure for reliability assessment. An application of Real Options Theory is given in the paper for decision making on maintenance for an offshore structure. Cash flow from oil revenue is modeled as a stochastic process. Preventive and corrective maintenance is analyzed as a critical situation where the decision maker has the option to pay the costs of maintenance in order to obtain a benefit. Expressions are derived for the estimation of the value of the maintenance option; they are based on the derivation of the Black-Scholes equation for the evaluation of financial options. It is shown that the value of such project is equal to the sum of the net cash flow of the project (as with a Net Present Value evaluation) plus the value of the maintenance option. Projects with one and two decision times along the life of the structure are formulated and analyzed. Closed form solutions are obtained for such cases. An example is given in order to illustrate the differences between maintenance decisions using the Net Present Value and the Real Options method.

scholarly journals Using the Discount Cash Flow Model in Preliminary Assessment for Gold Mine Projects

2020 ◽  
Vol 8 (6) ◽  
pp. 1935-1940
Keyword(s):  
Cash Flow ◽  
Net Present Value ◽  
Flow Model ◽  
Eastern Desert ◽  
Cost Data ◽  
Gold Mine ◽  
Present Value ◽  
Preliminary Assessment ◽  
Discount Cash Flow ◽  
Technical Factors

This study aims to the examination of the economic potential for the Abu Marawat Gold Project (AGP) in the Eastern Desert of Egypt and prediction the decision about go/not-to-go to invest in the deposit location. Discount Cash Flow (DCF) model used to calculate the Net Present Value (NPV) for the proposed gold mine project. NPV calculated by taking the risk and uncertainty produced from geological and technical factors into account. The actual production and cost data for Sukari Gold Mine (SGM) of Egypt used a benchmark for the theoretical calculation for production and cost data of AGP. From the valuation processes for AGP the NPV for the project predominantly positive, so, the project is acceptable to investment.

scholarly journals ANALISA BREAK EVEN POINT DAN NET PRESENT VALUE BERDASARKAN INPUT TARIF YANG BERLAKU DI KLINIK KESEHATAN AL - JADID SURABAYA

Jurnal IPTEK ◽  
2016 ◽  
Vol 20 (2) ◽  
pp. 21
Author(s):  
Kalam Mollah
Keyword(s):  
Cash Flow ◽  
Net Present Value ◽  
Trial And Error ◽  
Present Value ◽  
Break Even Point

Yayasan Nur Fadila yang beroperasi di beberapa wilayah di Indonesia seperti di Surabaya, Malang, Kediri dan Semarang selama ini berfokus pada pengembangan pondok pesantren dengan berbasis pada pembelajaran ilmu agama islam dan pengetahuan umum. Namun untuk saat ini Hidayatullah mengembangkan klinik kesehatan bagi masyarakat sekitar pondok pesantren. Sebagai salah satu gedung yang baru beroperasi di lingkungan pondok, maka klinik perlu melakukan analisis ulang tentang tarif yang berlaku pada saat ini. Adapun metode yang dipergunakan untuk menyelesaikan masalah tersebut adalah metode Break Even Point dan Net Present Value dengan suku bunga sebesar 12%. Dalam penyelesaiannya dengan metode BEP maka akan dimasukkan tarif yang berlaku saat ini. Dari analisa ini diperoleh tarif pada kondisi BEP sebesar Rp 36.919. Dengan cara trial and error pada cash flow melalui pendekatan Net Present Value yaitu dengan menjumlahkan tarif kelas pada kondisi Break even Point dengan asumsi kenaikan x% dari tarif normal pada kondisi BEP sehingga diperoleh Net Present Value yang lebih besar dari nol. Sehingga diperoleh hasil tarif kelas yang dicari pada kondisi NPV adalah sebesar Rp 92.298,-.

OPTIMASI STRIPPING RATIO DENGAN METODE DISCOUNTED CASH FLOW PADA PROJECT PLTU MULUT TAMBANG

2020 ◽  
Vol 4 (3) ◽  
pp. 128-133
Author(s):  
Yudi Arista Yulanda ◽  
M. Taufik Toha ◽  
Fahrurrozi Syarkowi
Keyword(s):  
Cash Flow ◽  
Discount Rate ◽  
Net Present Value ◽  
Spot Price ◽  
Present Value ◽  
Discounted Cash Flow

Harga batubara acuan pada bulan Januari 2020 adalah 65.93 USD/ton turun jauh dari tahun 2018 dimana harga batubara acuan sempat mencapai 107.83 USD/ton pada bulan Agustus. Dalam upaya menaikkan ratio elektrifikasi dalam RUPTL PLN 2018-2027 PLTU Mulut Tambang mendapatkan porsi 11 persen dengan peningkatan jumlah pembangkit setiap tahun nya. Keberadaan Batubara sebagai sumber daya alam yang terbatas dan tidak dapat diperbaharui menuntut penerapan prinsip konservasi cadangan batubara untuk mengoptimalkan keuntungan dan cadangan dengan memilih Stripping Ratio yang optimum. Tujuan penelitian ini yaitu untuk menentukan Stripping Ratio Optimum yang akan memberikan keuntungan terbaik menggunakan metode discounted cash flow sehingga batas penambangan optimum (Ultimate Pit Limit) juga dapat ditentukan. Optimasi ini dilakukan dengan men-generate data variasi Stripping Ratio yang menggambarkan pit limit dan cadangan dari masing-masing stripping ratio tersebut kemudian memasukkan konsiderasi ekonomi yang di discount rate untuk mendapat angka Net Present Value (NPV) sehingga bisa dianalisis dalam kurva optimasi. Hasil penelitian adalah Stripping Ratio optimum berdasarkan kurva optimasi dengan metode Konvensional NPV skenario Spot Price adalah 4.5 dengan total cadangan 7.5jt MT dan umur tambang 8 Tahun serta NPV 21,7 juta US$.

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