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A Monte Carlo Comparison between the Free Cash Flow and Discounted Cash Flow Approaches

Author

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  • Mehari Mekonnen Akalu

    (Erasmus University Rotterdam)

  • Rodney Turner

    (Erasmus University Rotterdam)

Abstract

One of the debates in the capital budgeting model selection is between the free cash flow and DCF methods. In this paper an attempt is made to compare SVA against NPV model based on Monte Carlo simulations. Accordingly, NPV is found less sensitive to value driver variations and has got higher forecast errors as compared to SVA model.

Suggested Citation

  • Mehari Mekonnen Akalu & Rodney Turner, 2002. "A Monte Carlo Comparison between the Free Cash Flow and Discounted Cash Flow Approaches," Tinbergen Institute Discussion Papers 02-083/1, Tinbergen Institute.
    • Handle: RePEc:tin:wpaper:20020083
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    File URL: https://papers.tinbergen.nl/02083.pdf
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    References listed on IDEAS

    as
    1. Terui, Nobuhiko & van Dijk, Herman K., 2002. "Combined forecasts from linear and nonlinear time series models," International Journal of Forecasting, Elsevier, vol. 18(3), pages 421-438.
    2. Mehari Mekonnen Akalu, 2002. "Measuring and Ranking Value Drivers," Tinbergen Institute Discussion Papers 02-043/2, Tinbergen Institute.
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    Cited by:

    1. Dragan Dejan & Rosi Bojan & Avžner Toni, 2017. "Synergies between an Observed Port and a Logistic Company: Application of the Discounted Cash–Flow Model and the Monte Carlo Simulation," Logistics, Supply Chain, Sustainability and Global Challenges, Sciendo, vol. 8(1), pages 1-18, May.

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    More about this item

    Keywords

    Capital budgeting; Investment appraisal; DCF methods; Project Analysis; Shareholder Value Analysis; Value Management Techniques.;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • L6 - Industrial Organization - - Industry Studies: Manufacturing
    • L8 - Industrial Organization - - Industry Studies: Services
    • L9 - Industrial Organization - - Industry Studies: Transportation and Utilities
    • M10 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - General
    • O22 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Project Analysis
    • O32 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Management of Technological Innovation and R&D

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