Professional Documents
Culture Documents
Business Valuation is a process and a set of procedures used to estimate the economic
value of an owner`s interest in a business. Business valuation approaches are used for
calculating the fair value of the business. Valuation implies the task of estimating the worth
value of an asset. In Business valuation, the valuation is required not only of tangible assets
(such as plant and machinery, land and buildings, office equipment’s) but also of intangible
assets (like goodwill, trademark, and brands patents) as well as human resources that manage
the business.
In this project we tried to analyse the some of the major approaches to valuation of business
units (with focus on equity share valuation) of in a multi-product software company
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Contents
CHAPTER -1 .......................................................................................................................................... 3
INTRODUCTION .................................................................................................................................. 3
Introduction ............................................................................................................................................. 4
CHAPTER 2 ......................................................................................................................................... 22
Review of literature............................................................................................................................... 22
CHAPTER 3 ......................................................................................................................................... 29
COMPANY PROFILE ....................................................................................................................... 29
CHAPTER-4 ......................................................................................................................................... 36
DATA ANALYSIS ............................................................................................................................... 36
FINDINGS ............................................................................................................................................ 40
SUGGESTIONS ................................................................................................................................... 40
CONCLUSION ..................................................................................................................................... 44
BIBLOGRAPHY .................................................................................................................................. 45
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CHAPTER -1
INTRODUCTION
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Introduction
General introduction
Businesses need to be valued for a number of reasons such as their purchase and sale,
obtaining a listing. Generally, valuation difficulties are restricted to unlisted companies
because listed companies have a quoted share price. However, even listed companies can
present valuation challenges for example when one is trying to predict the effect of a takeover
on the share price.
Business valuation helps to know what a business is worth. Valuation approaches helps in
finding out the worth of the business.
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Need of the study
i. Those business, whose principal assets are intangible in nature such as copyrights,
patents, trademarks, or goodwill will need a specialized business valuation model
that can ascertain the worth or value of the company
ii. The business will need to conduct a business valuation model to compute a fair
price for selling shareholder`s stock
iii. Selling a business should first have it valued. By doing so, you’ll help ensure that
you don’t sell your company for less than it is worth.
iv. By knowing the fair value of the company, it helps preventing from, setting the
price and expectations on the value of company. This valuation method also helps
in selling a division, territory, or product line
LIMITATIONS
Cash flow reflects assets utilized by company
Unutilized and underutilized assets may not get reflected in the valuation
model
This may be overcome by adding value of unutilized assets to cash flow. The
value again may be on assumption of asset utilization or market value or a
combination of these.
Owner’s estimate is the least scientific method for valuing a business.
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Research Methodology
Data relating to MAGNAQUEST has been collected through primary sources as well as
secondary sources.
The primary source of data involves formal discussions with the company’s managing
director and other department heads.
Tools used: Tables showing the valuation method of NPV over the period of study,
A business valuation can serve as a reality check on how the business is progressing
and how much the owner can ask from investors. Unfortunately, because so many buy/sell
transactions go unnoticed and unreported, owners of small & mid-sized businesses have a
tough time determining the value of their investment
Definition
Asset based approach focuses on determining the value of net assets from the perspective of
Equity share valuation. What is the basis of assets valuation be, is the central issue of this
approach.
Meaning
This method should be determined whether the assets should be valued at the book, market,
replacement, liquidation value. More often that not, they should be valued at book value, that
is original acquisition cost minus accumulated depreciation, as assets are normally acquired
with the intent to be used in business and not for sale
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Scope
Methods under the asset-based approach determine value by adding the sum of the parts of
the business. Underlying question: How much was paid, or would be paid, for the assets of
the business? Adjusted book value and liquidation value are examples. This method is usually
not suitable for companies that have a significant amount of intangible assets (most services
companies fall into this case of book value, assets and category).
The Value of the net assets is contingent upon the measure of value adopted for the purpose
of valuation of assets and liabilities. In the case of book value, assets and liabilities are taken
at their balance sheet values. In market value measures, assets shown in the balance sheet are
revalued at the current market prices. For the purpose of valuing the assets and liabilities it
will be useful for a finance manager\valuer to accord special attention to following points
i. While valuing tangible assets, such as plant and machinery, he should consider
aspects related to technological and capital improvements made in the recent years.
depreciation adjustment may also be needed in case the company is following
unsound depreciation policy in this regard
ii. Is the valuation of goodwill satisfactory, given the amounts of profits, capital
employed and average rate of return available on such businesses?
iii. With respect to current asset, are additional provisions required for unrealisability of
debtors? likewise , are adjustments required for unsalable stores and stocks
iv. With respect to liabilities, there is a need for careful examination of contingent
liabilities in particular where there is a mention of them in the auditor’s report, with a
view to assess what portion of such liabilities may fructify. Similarly adjustments may
be required on account of guarantees invoked, income tax, sales tax, and other
liabilities
Importance
An asset-based valuation approach is commonly used when a business has a very low or
negative value as a going concern. For example, consider the value of an airline company that
has few routes, high labour and other operating costs, and is losing millions of dollars each
year.
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Using the other valuation approaches, the company may have a negative value. However, to
one or more of the company's existing competitors, the company's routes, landing rights,
leases of airport facilities, and its ground equipment and airplanes may have substantial
value. An asset-based approach to valuing this company would value the company's assets
separately and aside from the money-losing business in which they are presently being
utilized.
The asset-based valuation approach will typically result in the lowest valuation of the three
approaches for a profitable company, but it nevertheless may result in an appropriate value
depending on the circumstances.
Advantages
Limitations
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Method of ASSET BASED APPROACH
Valuation of net assets is calculated with reference to the historical cost of the assets owned
by the company. Such value usually represents the minimum value or a support value of a
going concern. It is usual to ignore market value of the operating assets for the simple reason
that under the going concern valuation, it is not the intention to sell the assets on a piece meal
basis.
While the historical cost is adopted in respect of the assets that are to continue as a part of the
going concern, it is necessary to adjust the market value of non-operating assets like unused
land which are capable of being easily disposed of without affecting the operations of the
company.
In case of start-up companies (which are capital intensive in nature), where the commercial
production has not yet started.
In case of Investment Companies as Earnings Value based on its income in the form of
dividend and/or interest may not reflect its true value. In case of companies, which do not
have a sustainable track record of profits and has no prospects of earning profits in future?
In case of manufacturing companies, where fixed assets has greater relevance for earning
revenues. It would also be appropriate to use Net Assets Method for valuation in case of
companies operating in the industry, which is capital intensive and is relevant to revenues in
an industry, where norms are related to the capital cost per unit.
In case of companies, where there is an intention to liquidate it and to realise the assets and
distribute the net proceeds.
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Methodology
Net Assets value represents equity value which is arrived at after reducing all external
liabilities and preference shareholders claims, if any, from the aggregate value of all assets, as
valued and stated in the Balance Sheet as on valuation date.
Net Assets Value = Total Assets (excluding Miscellaneous Expenditure & Debit balance of
Profit & Loss account) – Total Liabilities
Or
Adjustments to NAV
The Net Asset Value (NAV) as arrived at by using the above-mentioned formula may be
adjusted depending upon circumstances of a particular case. The list given below showcases
some of the adjustments commonly made:
Contingent Liabilities
The amount of Contingent Liabilities as disclosed in the financial statements of the entity
needs to be adjusted from the value of net assets. The management’s perception of such
liability materialising should be considered. If necessary, legal opinion regarding
sustainability of claims or contingent liabilities should be called for.
Income tax demands 2. Excise demands 3. Sales tax/ Entry Tax demands 4. Entertainment tax
Investments
Investments, whether trade or non-trade should be considered at their Market value while
arriving at the Adjusted Net Assets value as they can be sold in the market on a piece meal
basis without affecting the operations of the company. For this, notional adjustment should be
made for any appreciation/ depreciation in the ]value of investments on a net of tax basis.
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Surplus Assets
The market value of surplus assets such as land and building not used for the business of the
company should be considered. The appreciation or depreciation in the value of surplus assets
adjusted for the tax liability or the tax shield on such appreciation or depreciation would be
added/deducted from the Net Assets Value.
This is more of a notional adjustment. Market value of such assets could be based on the
report of a technical valuer or on the estimates of the Management. Care should be taken if
the title of the assets is not clear or the possession of the property under consideration is not
with the owner.
Contingent Assets
If the company has made escalation claims, insurance claims or other similar claims, then the
possibility of their recovery should be carefully made on a fair basis, particularly having
regard to the time frame in which they are likely to be recovered. The likely cost to be
incurred for realizing the amount needs to be adjusted.
This method is generally used in case of liquidation. Where the business of the company is
being liquidated, its assets have to be valued as if they were individually sold and not on a
going concern basis. Liabilities are deducted from the liquidation value of the assets to
determine the liquidation value of the business. One should also consider liabilities which
will arise on closure such as retrenchment compensation, termination of critical contracts, etc.
Regard should also be made to the tax consequences of liquidation. Any distribution to the
shareholders of the company on its liquidation, to the extent of accumulated profits of the
company is regarded as deemed dividend. Dividend Distribution tax will have to be captured
for such valuation.
Replacement value is different from Net Assets Value as it uses the replacement value of
assets, which is usually higher than the book valuation. The term replacement cost refers to
the amount that a company would have to pay, at the present time, to replace any one of its
existing assets. Net replacement value of the assets indicates the value of an asset similar to
the original whose life is equal to the residual life of the existing asset. Replacement value
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includes not only the cost of acquiring or replicating the assets, but also all the relevant costs
associated with replacement.
Liabilities are deducted from the replacement value of the assets to determine the net
replacement value of the business.
Asset Based Method may not be relevant in case of companies operating in an industry where
human knowledge and creativity are more relevant as compared to physical assets in value
creation. In such cases, the Earnings Based Methods may be adopted
Terminology-
Book value: The book value of asset refers to the amount at which an asset is shown in the
balance sheet of a firm. Book value of a business refers to the total book value of all valuable
assets (excluding fictitious assets)
Market value: Market value refers to the price at which an asset can be sold in the market;
Market value of a business refers to the aggregate market value (as per stock market
quotation) of all equity shares outstanding
Economic value: The economic value of an asset is equal to the present value of the
incremental future cash inflows likely to accrue due to the acquisition of the asset; discounted
at the appropriate required rate of return (applicable to the specific asset intended to be
purchased)
Liquidation value: liquidation value refers to the price at which each individual asset can be
sold if business operations are discounted in the wake of liquidation of the firm, the
liquidation value of a business is equal to the sum of (is) realisable value of assets and (ii)
cash and bank balances minus the payments required to discharge all external liabilities
Replacement value: the replacement value is the cost of acquiring a new asset of equal utility
and usefulness. It is normally useful in valuing tangible assets such as office equipment and
furniture and fixtures
Salvage value: salvage value represents the scrap value on the disposal of assets after the
expiry of their economic useful life. It may be employed to value assets such as plant and
machinery
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Value of goodwill: A business firm can be said to have real goodwill in case it earns a rate of
return (ROR) on invested funds higher than the ROR earned by similar firms (with the same
level of risk). In operational terms, goodwill results when the firm excess (super) profits.
Fair value: Fair value is the average of book value, market value and intrinsic value
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Market value Based Approach to Valuation
Definition
A method of determining the appraisal value of an asset based on the selling price of similar
items. The market approach is a business valuation method that can be used to calculate the
value of property or as part of the valuation process for a closely held business. Additionally,
the market approach can be used to determine the value of a business ownership interest,
security or intangible asset. Regardless of what asset is being valued, the market approach
studies recent sales of similar assets, making adjustments for differences in size, quantity or
quality.
For example, if the subject company has EBIT of $ I million in the most recent fiscal year,
and comparable companies have been sold recently for an average of 5x EBIT, the subject
company's value should be about $5 million.
Scope
The variables in the market-based approach include, first, which aspects of the companies
should be compared, and second, which companies to select as comparables. As for
comparable companies, it may be easy to select several public companies that are in the same
or similar industry as the subject company to be valued, but if the subject company is not
publicly-traded and/or is much smaller than the public companies, the comparisons may have
limited usefulness. There are, however, a number of commercially available databases with
statistics on companies (both public and private) that have recently been acquired such as
Pratt's Stats, Mergerstat, and BizComps. Obviously, the more recent the data, and the more
similar the companies to be compared (in terms of size and industry), the more useful the
comparisons may be.
As for which aspects of the companies to compare, the most commonly compared aspect is
some form of earnings, but in some cases, total revenue or book value may be a more
appropriate aspect for comparison. Any number of other financial or other criteria may be
more or less useful to compare. For earnings, it is important to compare apples to apples.
Since taxable income may vary widely depending on financial and accounting considerations,
one commonly used earnings calculation, at least for smaller businesses, is net income before
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taxes, depreciation and amortization (EBITDA) plus the value of the owner's salary and
fringe benefits, sometimes collectively referred to as seller's discretionary earnings, or SDE.
Once the particular aspects to be compared are selected, the market-based approach provides
the value of the subject company by relating the value of the comparable companies on the
basis of the particular aspects compared. For example, if comparable companies have
recently sold for 5x EBIT, the subject company's value should be about 5x its EBIT, and if
comparable companies have recently sold for 2x book value, the subject company's value
should be about 2x its book value.
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iv. It is important to note that Regulatory bodies have often considered market value as
one of the very important basis — Preferential allotment, Buyback, Open offer price
calculation under the Takeover Code.
v. In earlier days due to non-availability of data, while calculating the value under the
market price method, high and low of monthly share prices were considered. Now
with the support of technology, detailed data is available for stock prices. It is now a
usual practice to consider weighted average market price considering volume and
value of each transaction reported at the stock exchange.
vi. If the period for which prices are considered also has impact on account of Bonus
shares, Rights Issue, etc., the valuer needs to adjust the market prices for such
corporate events.
MARKET COMPARABLES
This method is generally, applied in case of unlisted entities. This method estimates value by
relating the same to underlying elements of similar companies for past years. It is based on
market multiples of ‘comparable companies’. For example
Though this method is easy to understand and quick to compute, it may not capture the
intrinsic value and may give a distorted picture in case of short term volatility in the markets.
There may often be difficulty in identifying the comparable companies.
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Terminology-
Book value: The book value of asset refers to the amount at which an asset is shown in the
balance sheet of a firm. Book value of a business refers to the total book value of all valuable
assets (excluding fictitious assets)
Market value: Market value refers to the price at which an asset can be sold in the market;
Market value of a business refers to the aggregate market value (as per stock market
quotation) of all equity shares outstanding
Economic value: The economic value of an asset is equal to the present value of the
incremental future cash inflows likely to accrue due to the acquisition of the asset; discounted
at the appropriate required rate of return (applicable to the specific asset intended to be
purchased)
Liquidation value: liquidation value refers to the price at which each individual asset can be
sold if business operations are discounted in the wake of liquidation of the firm, the
liquidation value of a business is equal to the sum of (is) realisable value of assets and (ii)
cash and bank balances minus the payments required to discharge all external liabilities
Replacement value: the replacement value is the cost of acquiring a new asset of equal utility
and usefulness. It is normally useful in valuing tangible assets such as office equipment and
furniture and fixtures
Salvage value: salvage value represents the scrap value on the disposal of assets after the
expiry of their economic useful life. It may be employed to value assets such as plant and
machinery
Value of goodwill: A business firm can be said to have real goodwill in case it earns a rate of
return (ROR) on invested funds higher than the ROR earned by similar firms (with the same
level of risk). In operational terms, goodwill results when the firm excess (super) profits.
Fair value: Fair value is the average of book value, market value and intrinsic value
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FAIR MARET VALUE BASED APPROACH
Definition
1. The estimated value of all assets and liabilities of an acquired company used to consolidate
the financial statements of both companies.
2. In the futures market, fair value is the equilibrium price for a futures contract. This is equal
to the spot price after taking into account compounded interest (and dividends lost because
the investor owns the futures contract rather than the physical stocks) over a certain period of
time.
Standard setters define fair value as the amount for which an asset or liability can be
exchanged between knowledgeable, willing parties in an arm's length transaction. In an active
market, fair value equals observed market price. If there is no active market, fair value is an
estimate of value in use. The FASB distinguishes between three levels for estimating fair
value:
Using quoted prices for identical assets or liabilities in active markets whenever that
information is available (market values);
If quoted prices are not available for identical assets or liabilities, fair value should be
estimated using quoted prices of similar assets or liabilities (market equivalents);
If quoted prices of identical or similar assets or liabilities are not available or not
objectively determinable, fair value should be estimated using valuation methods
based on present value techniques of future earnings, or cash flows and valuation
techniques
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ADVANTAGES AND DISADVANTAGES OF FAIR MARKET VALUE
METHOD
Advantages
Fair market value is a financial concept relating to company assets. Current accounting
principles require companies to set asset values on current market information. Market value
is the price an individual or business pays with reasonable knowledge about the item in the
open market free from collusion or undue pressure (also known as arms-length transaction).
Fair market value accounting is a change from the historical cost companies have used in
years past when recording assets on financial statements. The fair market value process offers
advantages.
Fair market value can increase the company s asset value listed on its balance sheet. This
increase is the result of assets appreciating in value under current economic market
conditions. Asset increases improve a company’s total economic value added from business
operations. Economic value added is the result of taking total assets minus total liabilities
plus owner equity. This added value represents the true wealth a business owner has created
with his company.
Asset increases can also improve a company financial ratios. Financial leverage ratios
provide business owners with information about their company long-term solvency. The debt
ratio is a common financial leverage calculation. The debt ratio is total debt divided by total
assets; the calculations result indicates what percent of assets are financed by outside debt. A
lower percentage will result if assets are valued higher using fair market value principles.
Tax Benefits
Fair market value can provide companies with a few tax benefits. A decrease in an assets
value may be carried over to the company needs-to-come statement. This reduction results in
a loss from the fair market revaluation. A significant loss reduces the company overall
income for the accounting period and reduces the company income tax liability. Lower asset
values may also result in lower tangible property taxes at the state, county or local level.
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Individual Asset Benefits
Companies may find fair market value calculations provide specific benefits for individual
assets. Many companies invest in securities or other financial instruments that require them to
use fair market value accounting principles. Fair market value may result in a significant
increase in an asset value. Business owners can choose to sell this asset to take advantage of
the capital gain from the asset increase in value. Although the sale can result in additional tax
liability, selling the asset may be more prudent than holding onto it for an extended period of
time.
A primary advantage of fair value accounting is that it provides accurate asset and liability
valuation on an ongoing basis to users of a company’s reported financial information. When
the price of an asset or liability has increased or is expected to increase, the company marks
up the value of the asset or liability to its current market price to reflect what it would receive
if it sold the asset or would have to pay to relieve itself from the liability. Conversely, the
company marks down the value of an asset or liability to reflect any decrease in the market
price.
Disadvantages
True Income
Fair value accounting limits a company’s ability to potentially manipulate its reported net
income. Sometimes management may purposely arrange certain asset sales, for example, to
use gains or losses from the sales to increase or decrease net income as reported at its desired
time. Using fair value accounting, gains or losses from any price change for an asset or
liability are reported in the period in which they occur. While an increase in asset value or a
decrease in liability value adds to net income, a decrease in asset value or an increase in
liability value reduces net income
Value Reversal
Fair value accounting can also present challenges to companies and users of their reported
financial information. Conditions of the markets in which certain assets and liabilities are
traded may fluctuate often and even become volatile at times. Applying fair value accounting,
companies revaluate the current value of certain assets and liabilities even in volatile market
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conditions, potentially creating large swings in the value of those assets and liabilities.
However, as markets stabilize, such value changes likely reverse back to their previous
normal levels, making any reported losses or gains temporary, which means fair value
accounting may have provided misleading information at the time.
Market Effects
The use of fair value accounting may further affect a down market adversely. For example,
after an asset has been revalued downward because of drops in the current market trading
prices, the lower value of the asset could trigger greater selling of the asset at a potentially
even more depressed price. Without valuation markdown as required by fair value
accounting, companies may not feel the need to sell an asset in a down market to prevent
potentially further downward valuation of the asset. Absent additional selling pressures, the
market may stabilize over time, which would help preserve the value of the asset
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CHAPTER 2
Review of literature
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NPV (NET PRESENT VALUE) METHOD
Net present value is the present value of net cash inflows generated by a project including
salvage value, if any, less the initial investment on the project. It is one of the most reliable
measures used in capital budgeting because it accounts for time by using discounted cash
inflows.
Before calculating NPV, a target rate of return is set which is used to discount the net cash
inflows from a project. Net cash inflow equals total cash inflow during a period less the
expenses directly incurred on generating the cash inflow.
In simple words, NPV can be described as the “difference amount” between the sums of
discounted: cash inflows and cash outflows. It compares the present value of money today to
the present value of money in the future, taking inflation and returns into account.
Thus we have the following two formulas for the calculation of NPV:
1 − (1 + i)-n
NPV = R × − Initial Investment
I
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R1 R2 R3
NPV = + + + ... − Initial Investment
1 2 3
(1 + i) (1 + i) (1 + i)
Where,
i is the target rate of return per period;
R1 is the net cash inflow during the first period;
R2 is the net cash inflow during the second period;
R3 is the net cash inflow during the third period, and so on...
Decision Rule
Accept the project only if it’s NPV is positive or zero. Reject the project having negative
NPV. While comparing two or more exclusive projects having positive NPVs, accept the one
with highest NPV.
Positive NPV:
If present value of cash inflows is greater than the present value of the cash outflows, the net
present value is said to be positive and the investment proposal is considered to be
acceptable.
Zero NPV:
If present value of cash inflow is equal to present value of cash outflow, the net present value
is said to be zero and the investment proposal is considered to be acceptable.
Negative NPV:
If present value of cash inflow is less than present value of cash outflow, the net present value
is said to be negative and the investment proposal is rejected.
Project is acceptable
Project is acceptable
Let's assume Company XYZ wants to buy Company ABC. It takes a careful look at
Company ABC's projections for the next 10 years. It discounts those projected cash inflows
back to the present using its weighted average cost of capital (WACC) and then subtracts the
cost of purchasing Company ABC.
Year 1: $200,000
Year 2: $150,000
Year 3: $100,000
Year 4: $75,000
Year 5: $70,000
Year 6: $55,000
Year 7: $50,000
Year 8: $45,000
Year 9: $30,000
Total: $785,000
Now that we know the total cash flow for the next 10 years (the total cash inflows from the
investment), along with total cost of the investment in Company ABC, we can use the
formula to calculate NPV:
At this point, management for Company XYZ would use the net present value rule to decide
whether or not to pursue the acquisition of Company ABC. Because the NPV is negative,
they should say, “No.”
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Advantage and Disadvantage of NPV
Advantages:
Net present value accounts for time value of money. Thus it is more reliable than other
investment appraisal techniques which do not discount future cash flows such payback period
and accounting rate of return.
NPV is choosing an appropriate discount rate. Using different discount rates might favour
one investment versus another. The best way to deal with this is try multiple discount rates
within a range of possibilities to determine the sensitivity of the answer to the discount rate.
When NPV is positive, the investment is worthwhile; On the other hand, when it is negative,
it should not be undertaken; and when it is 0, there is no difference in the present values of
the cash outflows and inflows. In theory, an investor should undertake positive NPV
investments, and never undertake negative NPV investments .Thus, NPV makes the decision
making process relatively straight forward
NPV method is that it allows for easy comparisons of potential investments. As long as the
NPV of all options are taken at the same point in time, the investor can compare the
magnitude of each option. When presented with the NPVs of multiple options, the investor
will simply choose the option with the highest NPV because it will provide the most
additional value for the firm. However, if none of the options has a positive NPV, the
investor will not choose any of them; none of the investments will add value to the firm, so
the firm is better off not investing.
NPV is customizable so that it accurately reflects the financial concerns and demands of the
firm. For example, the discount rate can be adjusted to reflect things such as risk, opportunity
cost, and changing yield curve premiums on long-term debt.
Disadvantage:
It is based on estimated future cash flows of the project and estimates may be far from actual
results
NPV is based on future cash flows and the discount rate, both of which are hard to estimate
with 100% accuracy.
There is an opportunity cost to making an investment which is not built into the NPV
calculation.
The biggest disadvantage to the calculation of NPV is its sensitivity to discount rates After
all, NPV computations are really just a summation of multiple discounted cash flows both
positive and negative - converted into present value terms for the same point in time (usually
when the cash flows begin). As such, the discount rate used in the denominators of each
present value (PV) computation is critical in determining what the final NPV number will
turn out to be. A small increase or decrease in the discount rate will have a considerable
effect on the final output.
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NPV is only as accurate as the inputted information. It requires that the investor know the
exact discount rate, the size of each cash flow, and when each cash flow will occur. Often,
this is impossible to determine. For example, when developing a new product, such as a new
medicine, the NPV is based on estimates of costs and revenues .The cost of developing the
drug is unknown and the revenues from the sale of the drug can be hard to estimate,
especially many years in the future.
IMPORTANCE:
NPV is used to analyse an investment decision and give company management a clear way to
tell if the investment will add value to the company. Typically, if an investment has a positive
net present value, it will add value to the company and benefit company shareholders.
Net present value calculations can be used for either acquisitions (as shown in the example
above) or future capital projects. For example, if a company decides to open a new product
line, they can use NPV to find out if the projected future cash inflows cover the future costs
of starting and running the project. If the project has a positive NPV, it adds value to the
company and therefore should be considered.
TERMINOLOGY
Discounted cash flows: In finance, discounted cash flow (DCF) analysis is a method of
valuing a project, company, or asset using the concepts of the time value of money. All future
cash flows are estimated and discounted to give their present values (PVs)—the sum of all
future cash flows, both incoming and outgoing, is the net present value (NPV), which is taken
as the value or price of the cash flows in question. Present value may also be expressed as a
number of years' purchase of the future undiscounted annual cash flows expected to arise.
Using DCF analysis to compute the NPV takes as input cash flows and a discount rate and
gives as output a price; the opposite process—taking cash flows and a price and inferring a
discount rate—is called the yield. Discounted cash flow analysis is widely used in investment
finance, real estate development, corporate financial management and patent valuation
Book value: The book value of asset refers to the amount at which an asset is shown in the
balance sheet of a firm. Book value of a business refers to the total book value of all valuable
assets (excluding fictitious assets)
Market value: Market value refers to the price at which an asset can be sold in the market;
Market value of a business refers to the aggregate market value (as per stock market
quotation) of all equity shares outstanding
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Economic value: The economic value of an asset is equal to the present value of the
incremental future cash inflows likely to accrue due to the acquisition of the asset; discounted
at the appropriate required rate of return (applicable to the specific asset intended to be
purchased)
Liquidation value: liquidation value refers to the price at which each individual asset can be
sold if business operations are discounted in the wake of liquidation of the firm, the
liquidation value of a business is equal to the sum of (is) realisable value of assets and (ii)
cash and bank balances minus the payments required to discharge all external liabilities
Replacement value: the replacement value is the cost of acquiring a new asset of equal utility
and usefulness. It is normally useful in valuing tangible assets such as office equipment and
furniture and fixtures
Salvage value: salvage value represents the scrap value on the disposal of assets after the
expiry of their economic useful life. It may be employed to value assets such as plant and
machinery
Value of goodwill: A business firm can be said to have real goodwill in case it earns a rate of
return (ROR) on invested funds higher than the ROR earned by similar firms (with the same
level of risk). In operational terms, goodwill results when the firm excess (super) profits.
Fair value: Fair value is the average of book value, market value and intrinsic value
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CHAPTER 3
COMPANY PROFILE
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MAGNAQUEST COMPANY OVER VIEW
About
We serve over 250 enterprise customers across 36 countries with business critical solutions.
Our products, applications, solutions, and consulting practices enable improved processes and
substantial business gains for our customers.
We have a mission to service and add value to three global trends: Subscription-Lifecycle-
Management, Identity-based Outcomes and Customer Engagement.
We have three matured product lines for each business eco-system (Subscription, Identity and
Customer Engagement).
As a DNA, we work with high-value, long-term customers in these three areas characterized
by high demand and tremendous global opportunity.
We have development centers in India, the UAE, Malaysia, the USA, and Zambia; supported
by a sales network spanning the globe.
Growing at nearly 100% over last two years, Magnaquest is amongst the fastest growing mid-
sized software B2B solution enterprises in Asia.
Lines of Business
Solutions for multiple verticals – Media & Entertainment, Broadband & Telecom, Utilities,
Cloud Infrastructure and On-Demand with end-to-end feature set including Billing, CRM,
BSS & OSS, Customer Care, and Service Fulfilment.
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IDENTITY AND ACCESS MANAGEMENT (I.AM)
While supporting a variety of business types, we’ve developed our platform to operate with a
retailers perspective. Our functionality, process and paradigm are driven from our experience
in helping companies grow their customer base in multiple mediums of advertising. SMS
based advertising is an extremely powerful and effective medium to use in conjunction with
other mediums or as a stand-alone platform.
Vision
Our vision is to build a lasting entrepreneurial organization, beyond our lifetime and
generation.
Business Approach
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• Our opportunity map (Interspersing Solutions offering and Markets), is characterized
by few competitors, with possibility of significant market-share and a fast growing
niche-segment
Magnaquest has displayed marked risk-taking, maturity and strategic foresight from
inception, with a strong preference to solutions and products over services.
We have been at the forefront of newer delivery models and focused-frugal innovations.
We are the global pioneers in cutting-edge technologies and business waves; like Cloud
Computing, AGILE methodology and test-oriented development.
Globally, businesses across verticals ranging from Telecom, Broadband, Media &
Entertainment, Utilities and Cloud Computing are transforming their customer engagement
models to become Subscription-based.
SURE!
Solutions for multiple verticals: Media & Entertainment, Broadband & Telecom,
Utilities, Cloud & On-Demand Solutions
End-to-end solutions, including Billing, CRM, BSS & OSS, Customer Care, and
Fulfillment
Opportunities
The total market size for subscription management software (relevant to SURE!) is
projected to be around US $23 billion annually.
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• Spans across Industries: Media & Entertainment, Cloud Computing, Broadband &
Telecom, Energy & Utilities, Government Services, Insurance, Finance, et al
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The Identity Wave
I.Am
Opportunities
• The market size for Identity and Access Management (IAM) integrated Governance
and Compliance Management solutions is projected to be US$ 13 billion in coming
five years (Gartner & Forrester).
• Market size for EBT Solutions predicted to be in range of US$ 16-20 billion
Customer Engagement
OptCulture
Opportunities
The retail market where OptCulture can make relevant contribution to businesses is over $10
Billion over the next 5 years
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Progress and Achievements
We have 15+ years of experience of working with operators offering different services on
subscription model, especially in the context of Broadband, PayTV and Cloud services.
During this journey, we have gained experience of implementing our Business Support
Systems (BSS) / Operation Support Systems (OSS) solutions in multiple customer segments,
ranging from a subscriber base of 5K to market leaders with subscriber bases as high as 500K
to 800K.
The experience has given us tremendous understanding on various aspects of the market,
which in turn enabled us to formulate and implement right technology, products and solutions
strategies.
Based on the work done so far, we are presently trying to penetrate more into the emerging
markets in LATAM, Africa, APAC with our solutions for Broadband, Telecom and PayTV
players. With SURE! Cloud, we are aiming to penetrate into the developed nations like the
USA and Europe.
SURE! Awarded 4th BCS Ratna Outstanding Software Tech Award at BCS Ratna
Awards for 2013, an award instituted to recognize, reward and celebrate innovation,
excellence and achievement in Indian Broadcasting & Cable TV industry
High-end performance and scalability: SURE! was Certified by a joint benchmarking
exercise carried out in collaboration with HP as a product that can support 10 million
subscribers
SURE! for Cloud Players recognized among the Top Global Cloud Billing Systems
by Forrester
Magnaquest ranked in Top 40 among software vendors by PWC
Magnaquest is certified for ISO 9001:2008
Magnaquest is certified for PCI DSS standard
Top Product Software Exporter by HYSEA
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CHAPTER-4
DATA ANALYSIS
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Project the sales conservatively. Figure out the enterprise Value after four years. Discount
to get current value out.
SALES
We will assume that the enterprise value is x times sale in 2012. Say 5 times
A value of 5 is justifiable if there is continued growth of 20% and a net margin of 25%
Next we take the NPV, with the specified risk rate, discounting over roughly four years.
= 2923
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Risk rate of 36%
EVAPT
PV Factors:
Year 1 = 1 ÷ (1 + 20%) ^1 ≈ 0.833
Year 2 = 1 ÷ (1 + 20%) ^2 ≈ 0.6889
Year 3 = 1 ÷ (1 + 20%) ^3 ≈ 0.5717
Year 4 = 1 ÷ (1 + 20%) ^4 ≈ 0.4745
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Again we have to take 50% of value, as achieving the number depends on
additional money, company stability, and product depth.
NPV 17784
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FINDINGS
In Asset-based business valuations can be done on a going concern or on a liquidation
basis.
Earning Value Approach is the most popular business valuation method, for most
businesses, some combination of business valuation methods will be the fairest way to
set a selling price.
Valuation changes quickly, based on external factors like the economy and the
industry, and internal factors like the customer base, advertising, and ownership. Here
is a description of the most common business valuation methods
In NPV, There is an opportunity cost to making an investment which is not built into
the NPV calculation.
SUGGESTIONS
Investor has to think to use NPV method, as it is based on estimated future cash flows
of the project and estimates may be far from actual results
Establishing business value is also important when structuring a buy-sell agreement’s
terms for buying back owner shares.
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A primary advantage of fair value accounting is that it provides accurate asset and
liability valuation on an ongoing basis to users of a company’s reported financial
information
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CONCLUSION
Business valuation professionals provide independent, unbiased opinions of value for
business concerns of multiple natures and sizes. They also value intangible business assets
such as copyrights, employment agreements, trademarks, securities and goodwill. These
professional appraisers prepare merger and acquisition studies, employee stock ownership
plan feasibility analyses and other similar financial studies. They may be involved in
appraisals performed for estate and gift tax returns, buy-sell agreements, securities litigation,
equitable distribution in matrimonial matters and many other purposes.
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BIBLOGRAPHY
Business appraisals and the IRS (Michael Gregory oct-2010)
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