Essay on Discounted Cash Flow method of asset valuation

             Discounted cash flow method (DCF) present the analysis and valuation of an asset through the use of time value of money concept. In this method, project managers are required to estimate all future cash flows of a project or asset through discounting its value by using the cost of capital to give present values (PVs). Discounted Cash Flow method of asset valuation shows how much a value an asset will carry or how much investment is required to purchase a specific asset on the basis of the cost of capital. Basically, it considers the value of money that increases or decreases with the passage of time in response to the inflation and deflation in the society. Considering the time value of money involved it is also known as the risk-free rate of an investment or asset. Asset valuation also gets influence because of the depreciation or appreciation of the asset. Depreciation reduces the value of the asset while on the other hand appreciation is associated with an increase of value. Discounted Cash Flow method of asset valuation consider time related factor in the valuation of assets (Kruschwit & Loeffler, 2006).     

NPV’s sensitivity to changes in price and in quantity sold

Sensitivity analysis support project managers to take the right decision regarding project input and output. Sensitivity analysis describes how much output will get change in response to the changes occurred in the input. Similarly, it also supports in analyzing the dependency of input on each output. Changes occurred in the prices result in the increase or decrease in sales. Changes in the prices and quantity sold related to a project bring changes in overall project input and output. Therefore, sensitivity analysis is important. In an additional sensitivity analysis of NPV (net present value) shows that NPV (net present value) is sensitive to changes occurred in prices and quantity to be sold. We can calculate NPV (net present value) at different quantities to calculate the sensitivity of the NPV (net present value). High changes in the results show high sensitivity towards changes in the quantity to be sold. NPV (net present value) volatility depends upon changes and fluctuation in demand and sales of a product quantity. Moreover, volatility also addresses changes in prices. In this case, Auditizz Electronics Company is selling electronics products in the market at different prices. The company sold 105000 units in year 1, 156 000 units in Year 2; 189 000 units in Year 3; and 175 000 in Year 4. In accordance with the sensitivity analysis, NPV (net present value) will show high sensitivity to the changes in prices and changes in the quantity sold when values of all other variables will be kept constant (Ross, Westerfield, & Jordan, 2008).

               In addition, risk is undesirable in projects and organizational operations. Auditizz Electronics Company needs to focus on risk factor to prevent future losses in sales and business operations. Considering the importance and power of influence associated with risk factor now forecasting for risk factor is essential. Risk forecasting will address possible changes in the quantity to be sold, price changes, and market changes (market risk). Forecasting risk basically refers to the possibility of error occurrence in the projected cash flows that can cause incorrect decisions. Forecasting risk can lead to wrong decisions regarding projected cash flows.  Negative values of NPV is a clear indicator of wrong selection of prices or quantity to be sold. Thus, in the case of negative NPV (net present value) project should be rejected by the company or modifications should be made to make it a positive NPV (net present value) project. In forecasting risk, optimal quantity and prices are required to be set out. Moreover, forecasting risk is also important as it demonstrates the future environment for the project or overall business operations carried out in the Auditizz Electronics Company. Project managers need to focus on IRR (internal rate of return), ARR (accounting rate of return), payback period, and NPV (net present value) values to make right and appropriate decisions regarding project management. Moreover, the project management team should also an emphasis on forecasting risk to eliminate the possibility of error and to select the best course of actions, prices, and quantities for the sales of selected products (Bragg, 2010).