Investment = $1m

Question

Hello!

Can anyone please shed a light on why the investment of $1m for the new technology given on Table 4 isn't included in the costs when doing business valuation with the technology? In fact, it isn't included in any calculation at all. Is there a guideline for when investment costs should or shouldn't be included?

Thank you!

Answer 1

Hey !!

This is a super easy question with a structure.
Do not include it for : business valuation with Discounted Cash Flow.
Include it for : any Net Profit Value calculation.

BASIC STRUCTURE
Formula Business Valuation

Discounted Cash Flow Method: Business Value = Expect Annual Cash Flow / Annual Interest Rate
Profit point of view: Expect Annual Cash Flow = Revenu - Cost
Revenu point of view: Expect Annual Cash Flow = Revenu
Cost = Fixed Cost + Variable Cost

Formula Net Profit Value

Net Profit Value = Present Value - Investment Cost
Present Value = Future Value/Discount Rate
Future Value = Expect Annual Cash Flow

EXPLANATION
An Expect Annual Cash Flow is a cash flow you are going to get every year. The investment cost is a one-time investment so we are not considering it.

If it is helpful, upvote it ;)
Mounir F.