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Project Valuation
Published in Michael Curley, Environmental Finance for the Developing World, 2020
Note that this does not refer to the value which an engineer might place on a project in terms of labor and materials; rather here the concept of “financial valuation” will be explored. The idea of “financial valuation” centers on the notion that the value of money actually changes over time; and that to finance a project over time, one must know what is called the “time-value” of money.
Aviation Industry Valuation
Published in Bijan Vasigh, Ken Fleming, Liam Mackay, Foundations of Airline Finance, 2018
Bijan Vasigh, Ken Fleming, Liam Mackay
DCF valuation begins with a forecast of future cash flows to be generated by the firm or asset under consideration. For purposes of valuing an operating entity such as an airport, the appropriate cash flows to consider include operating revenue, operating expenses, and incremental investments or divestitures. While operating income may be used as a proxy for cash flow, non-cash items such as depreciation and amortization should be excluded from the calculation, and adjustments for taxes must be made. Forecast operating income is a function of growth from period to period and operating profit margins. Management decisions and policies affect incremental investment or divestiture of fixed and working capital. While the estimations can be complex and require certain assumptions and estimations, periodic cash flow may be simply defined as: CFt=Ri,t−1(1+gt)(1−Tt)−ΔR(ft+wt) where: CF = cash flow applicable to period t.R = revenueg = annual growth rate in revenueT = income tax ratef = incremental fixed capital investment required per dollar of revenue increase [investment net of replacement of existing capacity estimated by depreciation]w = incremental working capital investment required per dollar of revenue increase i = 1 or 2, 1 = landside revenue, 2 = airside revenue.
Determination of optimum insulation thickness by life cycle cost analysis for residential buildings in Turkey
Published in Science and Technology for the Built Environment, 2021
Nusret Aydin, Atilla Biyikoğlu
The LCCA method is used in calculating the optimum insulation thickness. The total heating and cooling costs over a period of time of N years is evaluated in the present value using the Present Worth Factor (PWF) (Ozel 2008). PWF is an integral component in the calculation of present worth of cash flow under the discounted cash flow model of investment valuation. Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows over a period of time. NPV is used in capital budgeting and investment planning to analyze the profitability of a projected investment or project. PWF is used to calculate the present value of costs for a given time. Therefore, PWF is used to calculate the present value of the total heating and cooling costs for the lifetime of 30 years in this study. The present worth factor is calculated based upon the inflation and interest rates by Equations (24) and (25) as follows: where, PWF is the present worth factor, i is the interest rate (TCMB 2018a), g is the inflation rate (TUİK 2018), r is the actual interest rate and N is the lifetime in years. The parameters used in PWF calculations are given in Table 3.
A decision support framework for economic evaluation of flexible strategies in pavement construction projects
Published in International Journal of Pavement Engineering, 2019
Asghar Nezhadpour Esmaeeli, Gholamreza Heravi
Some studies take into account the associated uncertainties by probabilistic approach (FHWA 1998, Tighe 2001, Reigle and Zaniewski 2002, Wu et al., 2017), and other, more recent studies consider the uncertainty associated with input factors by possibilistic approaches (Chen 2007, Li and Madanu 2009, Heravi and Esmaeeli 2014). The two mentioned categorisations of the study use a traditional project valuation approach which utilises discounted cash flow (DCF) technique in long-term assessment of projects. In the DCF method, the project is modelled by a preset scenario in which all future activities during the project life cycle are predetermined (with streams of revenues and expenditure, interest rates), regardless of how future events unfold (Yeo and Qiu 2003), and the possible changes in predicted demand and costs have no effect on management decisions and activity planning. The DCF method is unable to account for manager’s flexibility to alter the course as events unfold themselves and new information arrives (Espinoza 2014).
Simulation-based estimation of state-dependent project volatility
Published in The Engineering Economist, 2018
Mun (2002) points out that it is advantageous to use lattice approaches in management discussions, because they are intuitive and easy to understand. Brandão et al. (2005) point out that binomial decision trees may have even more intuitive appeal. The quality of results obtained with lattice or decision tree approaches depends, among other things, on an accurate modeling of underlying asset volatility. If there is only one significant source of project risk and that source of risk is a traded asset, then such an asset may be used as the single underlying asset of the project, and market data may be used for estimating its volatility (e.g., Smit 1997). However, most real-life projects have several sources of risk, and some of them are not traded. If many risk sources are simultaneously modeled, the problem becomes multidimensional, and the use of lattices or decision trees may become impractical. Copeland and Antikarov (2001) propose using the project without options as the underlying asset of the analysis in a lattice-based approach. Such an approach may lead to some suboptimal decisions (if the optimal decisions would depend on the values of all state variables), but it allows the problem to remain single-dimensional. This is, therefore, a useful approach, because it provides a simple way of incorporating risk and managerial flexibility in the analysis, allowing a more accurate valuation than traditional discounted cash flow methodologies.