Finance

Finance

Introduction

Value Investing is simply to invest in assets whose intrinsic value is well below its market price. Therefore, the only thing that should be taken into account when investing is the current price and intrinsic value of the assets. It's that simplest way. As Jesse Livermore said, one of the most successful investors in history:

“If you have a minute I'll tell you how to make money in the stock market and in valuable assets. Shop with low prices and sell at high prices. If you have 5 or 10 years will tell you when prices are low and when they are high”.

Discussion

There are several methods to calculate the present value of an asset, one of the most used the discounted cash flows (discounted cash flow). The method consists of calculating the present value of the asset by discounting the future cash flows to their present value. For this, we use a discount rate, which is the rate of return, opportunity cost, or whatever we may be. This is his formula:

DCF = CF1/ (1+r) ^1 + CF2/ (1+r) ^2 + CFn/ (1+r) ^n

For Non- Discount Cash Flow we will calculate Payback period and Accounting rate of return (ARR).

PP= (Cost of Project/Annual Cash Inflows)

ARR= Average profit/Average investment

After the calculation by the above Non- Discount Cash Flow and Discount Cash Flow it is recommendable that the company should purchase machine C. the reason for this is that machine C is showing higher value in terms of Discount Cash Flow show with 16.05 whereas others are showing lower value than this. Moreover, the NPV of the machine is also higher than higher NOV of the machine. As we know that the NPV (Net Present Value) is very important for the valuation of investments in fixed assets, despite its limitations in unforeseen or exceptional circumstances consider market (Jackson S., Sawyers R., Jenkins G., 2009, pp. 286). 

If its value is greater than zero, the project is profitable, considering the minimum value for investment performance. Company usually compares different alternatives to see if a project is better or worse. Usually the alternative with the highest NPV is usually the best for the institution, but need not always be so. There are times when a company chooses a project with a lower NPV due to various reasons such as might be the image that you bring to the company, whether for strategic or other reasons at the time of interest to this entity. You can also consider the interpretation of NPV, depending on value creation for the company:

If the NPV of a project is positive, the project creates value.

If the NPV of a project is negative, the project destroys value.

If the NPV of a project is zero, the project does not create or destroy value.

Moreover, the cash flow to equity is calculated as: Net Income for the period n + Depreciation (amortization period n) - Investments for the period n + (-) change in long-term debt for the period n (increase or decrease) - an increase of working ...