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Running Head: COMPANY VALUATION AND PRESENT VALUE 1
COMPANY VALUATION AND PRESENT VALUE 2
Company Valuation and Present Value
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Discounted cash flow is a present value concept of estimating the value of a firm based on its projected cash flows. This concept determines the value of a firm based on its anticipated income generation in the future (Ross et al. 2018). The method is often more relevant when the projected future cash flow and operating conditions are not consistent with the present performance levels. For instance, Buffett uses the discounted cash flow approach to estimate the income that he would receive from an investment based on the time value for money (Seeking Alpha, 2016). The discounted cash flow concept is very appropriate for a situation when an investor pays more in the present with expectations of earning better returns in the future. If the calculated discounted cash flow is higher than the current investment costs, then that is a good investment to venture in.
The discounted cash flow concept is very helpful to me as a person. This is because it will help me in choosing the right project to consider investing in. The concept gives insights on the best way to learn on which investment is worth investing in with the expectation of getting better returns on investment in the future (Ross et al. 2018). Starting up a profitable investment is the objective of every investor. Therefore the discounted cash flow concept will apply to me personally because I intend to invest my disposable income so that I get the most get net worth from the investment.
This is a concept that is becoming a primary crux financial market. This is because financial markets involve trading securities and derivatives at low costs with the expectation of getting high returns in the future. Investors in the financial markets thrive by buying stocks and other securities with a projected goal of selling them at a higher price in the future. Therefore, they can use the discounted cash flow approach to determine whether buying certain financial security at lower transaction costs will yield some returns when they sell it in the future (Ross et al. 2018). For instance, when buying precious metal, they determine the value based on the projection of how much money it will generate in the future.
References
Ross, S. A., Westerfield, R. W., Jaffe, J. F., & Jordan, B. D. (2018). Corporate finance: Core principles and applications (5th ed.). New York, NY: McGraw-Hill.
Seeking Alpha. (2016, March 28). Does Warren Buffett use discounted cash flow? Retrieved from https://seekingalpha.com/instablog/5969741-the-value-pendulum/4868716-warren-buffett-use-discounted-cash-flow
Running Head: PRESENT AND FUTURE VALUE 1
PRESENT AND FUTURE VALUE 2
Present and Future Value
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The fundamental principle of finance is that money is worth more the sooner it is received. The time value for money holds that amount of money that one has at present is more worth than the identical sum in the future. This is because the money that one has at present has a better and potential earning capacity. Net worth is what one owns, while disposable income is the taxable income that one gets from working or providing a service. A good investor uses his disposable income at present to improve his future net worth. Notably, there are available ways through which one can utilize the disposable income to get the most net worth by retirement age. One of these ways is making smart investments. From the disposable income, one can find a long term investment plan and improve his net worth slowly (Ross et al. 2018). For instance, I would advise my brother to invest his disposable income in mutual funds, real estate, and stocks. These are investments whose returns may sound slow, but with time, one can improve his net worth is a tremendous manner. Creating income from investments is a way of accumulating net worth. Investing for retirement feels like investing for other people, and it can sometimes be difficult to invest disposable income for the future when it sounds better to spend the money now. Investing disposable income offers exceptional returns on investments; thus, it is a very good way of getting the most net worth by retirement (Ross et al. 2018).
Another way of getting the most net worth by retirement is by increasing the disposable income through spending less (Ross et al. 2018). This involves tightening the budget on the expenses and luxuries to invest the increased disposable income and secure a better net worth in the future. Luxuries make the retirement grind uncomfortable and come with a degree of misery in the future. Thus cutting expenses involved in luxuries helps in building future net worth. Investing in education is also a good way of improving net worth by retirement. For instance, one can invest in the education of their children by taking an education insurance policy or opening a tax free saving plan, which ensures one can pay for their child’s school fees in the future with ease. This way, the net worth is preserved because the expenditure on education will already be sorted and taken care of. One needs to start planning for their retirement early enough to ensure that their net worth by the time they retire is at its best. In summation, when put in good use, disposable income offers a tangible return on investment, which aids in getting the most net worth by the retirement age (Ross et al. 2018).
Reference
Ross, S. A., Westerfield, R. W., Jaffe, J. F., & Jordan, B. D. (2018). Corporate finance: Core principles and applications (5th ed.). New York, NY: McGraw-Hill.
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