An Overview Of Allocating Capital And Corporate Strategy

Disadvantages of the Discounted Cash Flows
• Neglects indirect cash flows
• Difficultly in obtaining proper discount rates
• Lacks consideration of strategic options

The advantage of the Strategic Options approach is the ability to consider mutually exclusive projects. The real options method treats strategic options as derivative securities. This approach also generates a positive net present value oftentimes when the conventional discounted cash flows method returns a negative net present value. The real options approach uses the binomial valuation technique to determine an estimatation.

The ratio comparison approach is oftentimes used in valuing real estate as it compares real data to what is in the marketplace.

The price/earnings model is oftentimes used in valuation of the stock market. This approach obtains appropriate P/E ratios for the firm’s project by using a comparison investment for which two P/E ratios are available.

The competitive analysis approach, although subjective, states firms competing in the market should realize the only achieve a net present value when they have a competitive advantage versus other firms in the market. Valuing assets is different than valuing specific assets. Real, market determined values are used. This approach is flexible and realizes investments are dynamic and strategic.