Discounted cash flow: accounting for uncertainty

Abstract

Access to this document was granted through an Emerald subscription provided by INDIANA UNIVERSITY MEDICAL For Authors:If you would like to write for this, or any other Emerald publication, then please use our Emerald for Authors service. Information about how to choose which publication to write for and submission guidelines are available for all. Please visit www.emeraldinsight.com/authors for more information. About Emerald www.emeraldinsight.comWith over forty years' experience, Emerald Group Publishing is a leading independent publisher of global research with impact in business, society, public policy and education. In total, Emerald publishes over 275 journals and more than 130 book series, as well as an extensive range of online products and services. Emerald is both COUNTER 3 and TRANSFER compliant. The organization is a partner of the Committee on Publication Ethics (COPE) and also works with Portico and the LOCKSS initiative for digital archive preservation. AbstractPurpose -Valuation is the process of estimating price. The methods used to determine value attempt to model the thought processes of the market and thus estimate price by reference to observed historic data. This information is utilised in the discounted cash flow (DCF) valuation model to determine the single point valuation figure. However, the valuation will be affected by uncertainties: uncertainty in the comparable data available; uncertainty in the current and future market conditions and uncertainty in the specific inputs for the subject property. These input uncertainties will translate into an uncertainty with the output figure, the estimate of price. This paper discusses ways in which uncertainty can be incorporated into the DCF model. Design/methodology/approach -This paper looks at the way in which uncertainty can be incorporated into the explicit DCF model. This is done by recognising that the input variables are uncertain and will have a probability distribution pertaining to each of them. Thus by utilising a probability-based valuation model (using Crystal Ball) it is possible to incorporate uncertainty into the analysis and address the shortcomings of the current model. Findings -The outcome of introducing uncertainty in the inputs is to produce a range of different answers. The central tendency of this distribution is very close to the single point estimate of the static model, yet the user of the technique now benefits from an understanding of the upside and downside risk pertaining to this single point estimate.Originality/value -This study contributes significantly to the practical application of probability-based models to valuation. In particular, the findings from the study will be useful for clients to understand better the context in which a valuation figure is provided to them.

High-impact information types on market value: property appraisers’ information sources and assessment confidence

“…There will always be an uncertainty in the information used as input, and this uncertainty will transfer to the output (French & Gabrielli, 2005). This suggests that various types of information have different effects on property appraisals and on estimates of property objects' market values.…”

“…This article uses seven of these constructs based on previous property research (Chen & Yu, 2009;French & Gabrielli, 2005;Levy & Schuck, 2005;Nordlund, 2008;Tidwell & Gallimore, 2014): (1) information comes, to a small-large extent, from the property owner, (2) assessment is based, to a small-large extent, on property-specific information, (3) assessment is based, to a small-large extent, on market-specific information, (4) information is slightly-highly reliable, (5) information is difficult-easy to assess, (6) assessment requires many-few second opinions and (7) information has little-major impact on the property's estimated market value. Each construct is ranked on a 7-point Likert-type scale with endpoints at 1 and 7 (cf.…”

“…According to French and Gabrielli (2005), uncertainties in available information about both the property market and the property object affect the estimated value of a specific property object regardless of the valuation model used. Öhman, Söderberg, and Uhlin (2012) point to a lack of research on assessments of various types of information used in valuation models at the property object level.…”

Rough Set Theory for Real Estate Appraisals: An Application to Directional District of Naples

“…Adair and Hutchinson [29] take a different approach instead; they suggest risk scoring to report the level of risk within property pricing. In a similar way, other instruments from risk analysis could be used, such as scenarios in combination with confidence intervals, real option analysis [30], or Monte Carlo simulations [31]. Therefore, the challenge is to improve the output of an appraisal in just the right way, possibly with the help of qualitative or quantitative instruments known from the strategic management literature [32].…”

Continuing Value Calculation with Discounted Cash Flows Method: An Application Example for Tekart Tourism Establishment Whose Shares Are Dealt in Istanbul Stock Exchange

“…Each method produced to guess the price and marketing value of the asset investment right should contain validity (French & Gabrielli, 2005).…”