CFROI valuation by Bartley J. Madden
Author:Bartley J. Madden
Language: eng
Format: epub, pdf
Tags: Corporations -- Valuation., Corporations -- Finance., Cash flow., Cash management.
Publisher: Butterworth-Heinemann
Published: 1999-09-19T16:00:00+00:00
CFROI Valuation: a total system approach to valuing the firm
The forecasted 10.7 per cent CFROI + l-year is based on $651 million of current dollar gross assets, which includes $202 million non-depreciating assets; $85 million gross cash flow; and an asset life of 14 years. Over years 4-1 to +14, as shown in Figure 7.9, the existing assets are forecasted to wear out and their cash flows to wind down. Portions of the plant account will be retired and non-depreciating assets released, based on the same logic as described in the calculation procedures for the model firm in Chapter 3.
The upper table of Figure 7.9 focuses on the total firm from years +1 to +14, and includes new investments beginning in year +1. The lower table focuses on the receipts derived from assets existing at year 0; i.e., gross cash flow [line (7)] and released non-depreciating assets [line (8)]. Line (14) shows a cumulative present value of these receipts equal to $642 million, which is the warranted value of Donaldson's existing assets at year-end 1997.
Besides asset life, the key determinants of the receipts in years +1 to +14 are the age of existing plant and the forecasted fade rate for CFROIs. The older the plant, the more rapid the wind down of cash flows because of larger plant retirements in earlier years. 6
Compare future total gross cash flow to the firm [line (4)] with gross cash flow received from existing assets [line (7)]. As new investments are made beginning at +l-year, they account for an increasingly larger share of total cash flow which begins at +2-year. Meanwhile, existing year 0 assets wear out and account for a decreasing share of total cash flow. As plant is retired, year 0 gross assets [line (5)] decline and non-depreciating assets are released [line (8)]. Note that the sum of released non-depreciating assets [line (8)] equals 184 (rounded), which is the amount of non-depreciating assets included in existing assets at year 0.
Value of future investments
There are two basic steps in calculating the present value of the NCR stream generated by future investments that follow the forecasted life cycle shown in Figure 7.8. The two steps are described in Chapter 3, beginning on page 76. First, the incremental wealth created from each future investment is computed as the present value of that investment in the year undertaken less the amount invested. Second, that incremental wealth is then discounted to a present value for 'today'. The cumulative amount of these present values represents the estimated value of the firm's future investments.
Figure 7.10 presents data related to the calculation of wealth created in year +3 from new investments in that year. Earlier in this chapter we discussed that, in displaying historical time series,
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