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IC Broker, Inc. |
PRODUCTION FUNCTION ANALYSIS (CAPITAL VALUATION) |
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Feb-02 |
Cash Flow NPV |
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0.2 |
Discount Rate (cost of borrowing) |
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Market rate = investments of a simular nature |
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Year |
Free Cash Flow |
NPV at 20% discount |
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Factored in is companies expected cost |
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1 |
97,278 |
$77,822 |
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of capital (i.e., the interest rate on an acquisition loan) |
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2 |
818,109 |
$654,487 |
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and the expected inflation rate |
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3 |
1,538,940 |
$1,231,152 |
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4 |
2,259,771 |
$1,807,817 |
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5 |
2,980,602 |
$2,384,481 |
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$6,155,759 |
* Present value of 5-year cash flow |
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Residual value* of |
14,903,008 |
$4,406,309.56 |
* Company's perpetuity earnings value |
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business at 5 years: |
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(IRR - Computed Internal Rate of Return) |
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$1,749,449.72 |
Total present value of company |
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*Note: the residual value was computed by taking the fifth
year's |
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projected value and dividing by the discount rate: $108,000/.20
= $540,000. |
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Discounted cash flows method |
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Take the estimated cash flow from the last year forecast |
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Assume that level of cash flow will continue indefinitely into
the future |
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Result = Determined the residual value |
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that the company will have after the five years of projected
statements |
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* Conservative prediction does not include post five year growth |
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