# Banks management

Value a firm using Discounted Cash Flow approach.  Assume the small business forecasted the following information for the next 5 years and the interest rate is 5%

 Year   1 Year   2 Year   3 Year   4 Year   5 Cash   Inflow 5   million SAR 1   million SAR 3   million SAR 6   million SAR 7   million SAR Cash   Outflow 5   million SAR 3   million SAR 3   million SAR 2   million SAR 2   million SAR

1-      What is value of the firm using DCF approach?

2-      If you work as financial analyst for a private equity, would you recommend financing for this small business? Why?

DCF = Net CashCash flow (i)/( 1 + Interest rate)^ no of periods (i)

Net Cash flow = Cash inflow - Cash outflow

Interest rate = 5% given in the question

No of periods is the year before which cash flow occurs

 Value in Million SAR Year 1 2 3 4 5 cash inflow 5 1 3 6 7 Cash Outflow 5 3 3 2 2 present value Formula 5/(1+0.05)^1 3/(1+0.05)^2 0/(1+0.05)^3 4/(1+0.05)^4 5/(1+0.05)^5 Net Cashflow 0 -2 0 4 5 Present value of the cash flow 0 -1.814058957 0 3.290809899 3.917630832

Net present value today is the sum of all discounted cash flows

so DCF value comes out to be 5.39 million SAR which is the value of the firm.

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