Discounted free cash flow method

Nevertheless, nowadays the maximization of the shareholder s value (SHV) seems to be the main priority of the firms and what really drives their decisions. The use of SHV as the objective to be maximized is mainly motivated by the fact that it reflects in a rather accurate way the capacity that the company has to create value. The SHV of the firm can bee indeed improved by maximizing its CV. According to Weissenrieder (1998), the market value of a company is a function of four factors (i) investment, (ii) cash flows, (iii) economic life, and (iv) capital cost. Specifically, this model applies the discounted-free-cash-flow method (DFCF) to compute the CV of a company. 

The Discounted-Free-Cash-Flow Method (DFCF)... 

The framework suggested in this book is thus in consonance with the new trends in PSE, which are going toward an enterprise wide optimization framework that aims to integrate all the functional decisions into a global model that should optimize an overall key performance measure. Here, it is proposed the corporate value measured through the discounted free cash flow method as a suitable first approach to this posed requirement. 

It is given a set of existing products and a set of potential products. Failure to pass clinical trial implies termination of the development project. The clinical trial for each new product trial has a probability of success, an associated duration and cost, which are assumed to be known. On the SC side, it is assumed that various items of technological equipment are available to be installed in existing and potential facility sites. Regarding the financial area, the formulation endeavors to model cash management and value creation. To calculate corporate value (CV) the discounted-free-cash-flow (DFCF) method is utilized. 

Similarly to the Design-planning formulation, the financial formulation follows that presented in Chap. 2 (Eqs. (2.29)-(2.60)). Such formulation uses the discounted-free-cash-flow (DFCF) method in order to carry out the firm s valuation. Again, the formulation has been extended to consider the different scenarios associated with clinical trial outcomes by adding the extra index g to each variable. However, some modifications are required to incorporate the costs of development projects (RDcostirjictg, ei,c)tg) and some equations must be included so as to calculate the expected CV as well. This set of modified and new equations are described next. 

In the strategy presented in this chapter the method of discounted free cash flow (DFCF) method is applied to assess the decisions undertaken by a Arm. The DFCF method calculates the enterprise value by determining the present value of its future cash flows and discounting them taking into account the appropriate capital cost during the planning horizon defined (Grant 2003). 

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