ÿþ<HTML> <HEAD> <TITLE>Business Valuation - Discounted Cash Flow</TITLE> <META HTTP-EQUIV="Content-Type" CONTENT="text/html; charset=iso8859-1"> <META NAME="description" CONTENT="Financial Calculators, ©1998-2010 KJE Computer Solutions, LLC. For more information please see http://www.dinkytown.net"> <STYLE> <!-- BODY, TABLE, TD, TH, UL, OL, DD, DL, P, BR { font-family: helvetica, arial, sans-serif; font-size: 10pt; } H1 { font-family: helvetica, arial, sans-serif; font-size: 13pt; font-weight: bold; } DT { font-family: helvetica, arial, sans-serif; font-size: 10pt; font-weight: bold; } P.footer { font-family: helvetica, arial, sans-serif; font-size: 9pt; } DIV.large { font-family: helvetica, arial, sans-serif; font-size: 13pt; font-weight: bold; } --> </STYLE> </HEAD> <!-- Financial Calculators, ©1998-2008 KJE Computer Solutions, LLC. 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For more information please see: <A HREF="http://www.dinkytown.net">http://www.dinkytown.net</A> --> <H1>Business Valuation - Discounted Cash Flow</H1><P>Business valuation is typically based on three major methods: the income approach, the cost approach and the market (comparable sales) approach. Among the income approaches is the discounted cash flow methodology  calculating the net present value ("NPV") of future cash flows for an enterprise. As an alternative to the more abbreviated income capitalization approach, this methodology is more relevant where future operating conditions and cash flows are variable  or not projected to be materially consistent with current performance levels.<P><CENTER> <!--[if IE]><object name="calculator" classid="clsid:8AD9C840-044E-11D1-B3E9-00805F499D93" codebase="http://java.sun.com/update/1.6.0/jinstall-6-windows-i586.cab#Version=1,4,0,0" height="400" width="565"><param name="code" value="BusinessValuation" /><param name="archive" value="dinkytown.jar" /> <P style="font-size:1px; color: #ffffff" line-height: 1px><![endif]--><![if !IE]><P style="font-size:1px; color: #ffffff" line-height: 1px><![endif]></P><![if !IE]><APPLET name="calculator" code="BusinessValuation.class" align="baseline" WIDTH="565" HEIGHT="400" archive="dinkytown.jar"><![endif]> <PARAM name="OPERATING_PROFIT1" value="100000"> <PARAM name="INTEREST_EXPENSE1" value="0"> <PARAM name="INTEREST_INCOME1" value="0"> <PARAM name="INCOME_TAXES1" value="0"> <PARAM name="DEPRECIATION_AND_AMORTIZATION1" value="0"> <PARAM name="CHANGE_IN_NOTES_PAYABLE1" value="0"> <PARAM name="CHANGE_IN_INVENTORY1" value="0"> <PARAM name="CHANGE_IN_ACCOUNTS_RECEIVABLE1" value="0"> <PARAM name="OTHER_NET_CHANGE1" value=""> <PARAM name="CAPITAL_EXPENDITURES1" value="10000"> <PARAM name="OTHER_NET_AMOUNT1" value="0"> <PARAM name="OPERATING_PROFIT2" value="110000"> <PARAM name="INTEREST_EXPENSE2" value="0"> <PARAM name="INTEREST_INCOME2" value="0"> <PARAM name="INCOME_TAXES2" value="0"> <PARAM name="DEPRECIATION_AND_AMORTIZATION2" value="0"> <PARAM name="CHANGE_IN_NOTES_PAYABLE2" value="0"> <PARAM name="CHANGE_IN_INVENTORY2" value="0"> <PARAM name="CHANGE_IN_ACCOUNTS_RECEIVABLE2" value="0"> <PARAM name="OTHER_NET_CHANGE2" value="0"> <PARAM name="CAPITAL_EXPENDITURES2" value="10000"> <PARAM name="OTHER_NET_AMOUNT2" value="0"> <PARAM name="OPERATING_PROFIT3" value="121000"> <PARAM name="INTEREST_EXPENSE3" value="0"> <PARAM name="INTEREST_INCOME3" value="0"> <PARAM name="INCOME_TAXES3" value="0"> <PARAM name="DEPRECIATION_AND_AMORTIZATION3" value="0"> <PARAM name="CHANGE_IN_NOTES_PAYABLE3" value="0"> <PARAM name="CHANGE_IN_INVENTORY3" value="0"> <PARAM name="CHANGE_IN_ACCOUNTS_RECEIVABLE3" value="0"> <PARAM name="OTHER_NET_CHANGE3" value="0"> <PARAM name="CAPITAL_EXPENDITURES3" value="10000"> <PARAM name="OTHER_NET_AMOUNT3" value="0"> <PARAM name="OPERATING_PROFIT4" value="133100"> <PARAM name="INTEREST_EXPENSE4" value="0"> <PARAM name="INTEREST_INCOME4" value="0"> <PARAM name="INCOME_TAXES4" value="0"> <PARAM name="DEPRECIATION_AND_AMORTIZATION4" value="0"> <PARAM name="CHANGE_IN_NOTES_PAYABLE4" value="0"> <PARAM name="CHANGE_IN_INVENTORY4" value="0"> <PARAM name="CHANGE_IN_ACCOUNTS_RECEIVABLE4" value="0"> <PARAM name="OTHER_NET_CHANGE4" value="0"> <PARAM name="CAPITAL_EXPENDITURES4" value="10000"> <PARAM name="OTHER_NET_AMOUNT4" value="0"> <PARAM name="EXPECTED_ANNUAL_GROWTH" value="10.0"> <PARAM name="WEIGHTED_AVERAGE_COST_OF_CAPITAL" value="19.0"> <!--CUSTOM PARAMETERS--> <PARAM name="TEXT_FOR_REPORT" value="<HTML> <HEAD> <TITLE>Business Valuation - Discounted Cash Flow</TITLE> <META HTTP-EQUIV='Content-Type' CONTENT='text/html; charset=iso8859-1'> <META NAME='description' CONTENT='Financial Calculators, &QCPQ;1998-2010 KJE Computer Solutions, LLC. For more information please see http://www.dinkytown.net'> <STYLE> <!-- BODY, TABLE, TD, TH, UL, OL, DD, DL, P, BR { font-family: helvetica, arial, sans-serif; font-size: 10pt; } H1 { font-family: helvetica, arial, sans-serif; font-size: 13pt; font-weight: bold; } DT { font-family: helvetica, arial, sans-serif; font-size: 10pt; font-weight: bold; } P.footer { font-family: helvetica, arial, sans-serif; font-size: 9pt; } DIV.large { font-family: helvetica, arial, sans-serif; font-size: 13pt; font-weight: bold; } --> </STYLE> </HEAD> <BODY bgcolor='#FFFFFF' LINK='#003399' VLINK='#666666' BGCOLOR='#FFFFFF'> <CENTER><table border=0 bgcolor='#000000' width=468 cellspacing=1 cellpadding=0><tr><td width='100%'><table bgcolor='#FFFFDD' border=0 width=468 cellspacing=1 cellpadding=5><tr><td width='100%' align=center valign=middle><DIV class=large>Business Valuation Results</DIV></td></tr></table></TD></TR></TABLE></CENTER> <H1>The estimated value of your business is NPV_VALUE.</H1>**GRAPH**<P>The estimated value of your business is NPV_VALUE. This valuation is based on the present value of all future cash flows generated by your business. To calculate this value, we first calculated your estimated cash flow by year, assuming that your business would exist indefinitely. Each year's estimated cash flow was then discounted by WEIGHTED_AVERAGE_COST_OF_CAPITAL (your weighted average cost of capital) and the number of years until the cash flow would be realized. The sum of all of your future discounted cash flows is the net present value of your business. <P>Your cash flow was estimated in two parts: from your cash flow statement, and based on a future growth of EXPECTED_ANNUAL_GROWTH. Your business' predicted cash flow for years one through four was taken directly from the values entered for those years. For year 5 and beyond, your cash flow was estimated based on an annual compound growth of EXPECTED_ANNUAL_GROWTH. <H1>What else can I do to increase my valuation?</H1><UL> <LI><B>Increase your operating profits:</B> <BR>You can directly impact your valuation by becoming more profitable. Increased efficiency and lower operating expenses can have a dramatic impact on your business' valuation. Even relatively small increases in profitability can have a dramatic impact on your valuation. <P> <LI><B>Reduce inventory and accounts receivable:</B> <BR>By reducing your inventory and accounts receivable, you can decrease the amount of capital that is tied up in your business. The net change directly affects your valuation. <P> <LI><B>Reduce your taxes:</B> <BR>Very much like reducing your inventory, reducing your tax burden can directly impact the value of your business. A business that creates effective tax shields can be worth substantially more than one that doesn't consider this important variable. <P> <LI><B>Effective capital expenditures:</B> <BR>Target your capital expenditures to projects that increase your growth rate, or increase your profitability. While capital expenditures reduce your near-term cash flow, effective investment in your business can have a positive impact in your valuation. </UL> <P> <H1>Your cash flow statement:</H1><CENTER> <table border=0 bgcolor='#000000' width=95% cellspacing=1 cellpadding=0><tr><td width='100%'><table bgcolor='#FFFFFF' border=0 width=100% cellspacing=1 cellpadding=5> <TR VALIGN=TOP><TD COLSPAN=5 BGCOLOR='#CCCCCC'><B>Net Cash flow</B></TD></TR> <TR VALIGN=TOP BGCOLOR='#CCCCCC'> <TD>&NBSP;</TD> <TD><B><CENTER>Year 1</CENTER></B></TD> <TD><B><CENTER>Year 2</CENTER></B></TD> <TD><B><CENTER>Year 3</CENTER></B></TD> <TD><B><CENTER>Year 4</CENTER></B></TD> </TR> <TR><TD><b>Net cash flow </b> </TD> <TD><b>NET_CASH_FLOW1</b></TD> <TD><b>NET_CASH_FLOW2</b></TD> <TD><b>NET_CASH_FLOW3</b></TD> <TD><b>NET_CASH_FLOW4</b></TD> </TR></TABLE></TD></TR></TABLE> <P> <table border=0 bgcolor='#000000' width=95% cellspacing=1 cellpadding=0><tr><td width='100%'><table bgcolor='#FFFFFF' border=0 width=100% cellspacing=1 cellpadding=5> <TR BGCOLOR='#CCCCCC'><TD COLSPAN=5><CENTER><B>Cash flow from operations</B></CENTER></TD></TR> <TR VALIGN=TOP BGCOLOR='#CCCCCC'> <TD>&NBSP;</TD> <TD> <B><CENTER>Year 1</CENTER></B></TD> <TD> <B><CENTER>Year 2</CENTER></B></TD> <TD> <B><CENTER>Year 3</CENTER></B></TD> <TD> <B><CENTER>Year 4</CENTER></B></TD> </TR> <TR VALIGN=TOP><TD><b>Operating profit</B></TD> <TD>OPERATING_PROFIT1</TD> <TD>OPERATING_PROFIT2</TD> <TD>OPERATING_PROFIT3</TD> <TD>OPERATING_PROFIT4</TD> </TR> <TR VALIGN=TOP><TD><b>Interest expense</B></TD> <TD>INTEREST_EXPENSE1</TD> <TD>INTEREST_EXPENSE2</TD> <TD>INTEREST_EXPENSE3</TD> <TD>INTEREST_EXPENSE4</TD> </TR> <TR VALIGN=TOP><TD><b>Interest income</B></TD> <TD>INTEREST_INCOME1</TD> <TD>INTEREST_INCOME2</TD> <TD>INTEREST_INCOME3</TD> <TD>INTEREST_INCOME4</TD> </TR> <TR VALIGN=TOP><TD><b>Income taxes</B></TD> <TD>INCOME_TAXES1</TD> <TD>INCOME_TAXES2</TD> <TD>INCOME_TAXES3</TD> <TD>INCOME_TAXES4</TD> </TR> <TR VALIGN=TOP><TD><b>Depreciation and amortization</B></TD> <TD>DEPRECIATION_AND_AMORTIZATION1</TD> <TD>DEPRECIATION_AND_AMORTIZATION2</TD> <TD>DEPRECIATION_AND_AMORTIZATION3</TD> <TD>DEPRECIATION_AND_AMORTIZATION4</TD> </TR> <TR><TD><b>Net from operations </b> </TD> <TD><b>CASH_FLOW_FROM_OPERATIONS1</b></TD> <TD><b>CASH_FLOW_FROM_OPERATIONS2</b></TD> <TD><b>CASH_FLOW_FROM_OPERATIONS3</b></TD> <TD><b>CASH_FLOW_FROM_OPERATIONS4</b></TD> </TR> <TR><TD COLSPAN=5>&NBSP;</TD></TR> <TR VALIGN=TOP><TD COLSPAN=5 BGCOLOR='#CCCCCC'><B>Cash flow from change in operating assets & liabilities</B></TD></TR> <TR VALIGN=TOP><TD><b>Change in accounts payable</B></TD> <TD>CHANGE_IN_NOTES_PAYABLE1</TD> <TD>CHANGE_IN_NOTES_PAYABLE2</TD> <TD>CHANGE_IN_NOTES_PAYABLE3</TD> <TD>CHANGE_IN_NOTES_PAYABLE4</TD> </TR> <TR VALIGN=TOP><TD><b>Change in inventory</B></TD> <TD>CHANGE_IN_INVENTORY1</TD> <TD>CHANGE_IN_INVENTORY2</TD> <TD>CHANGE_IN_INVENTORY3</TD> <TD>CHANGE_IN_INVENTORY4</TD> </TR> <TR VALIGN=TOP><TD><b>Change in accounts receivable</B></TD> <TD>CHANGE_IN_ACCOUNTS_RECEIVABLE1</TD> <TD>CHANGE_IN_ACCOUNTS_RECEIVABLE2</TD> <TD>CHANGE_IN_ACCOUNTS_RECEIVABLE3</TD> <TD>CHANGE_IN_ACCOUNTS_RECEIVABLE4</TD> </TR> <TR VALIGN=TOP><TD><b>Other net change</B></TD> <TD>OTHER_NET_CHANGE1</TD> <TD>OTHER_NET_CHANGE2</TD> <TD>OTHER_NET_CHANGE3</TD> <TD>OTHER_NET_CHANGE4</TD> </TR> <TR ><TD><b>Net from change in assets & liabilities </b> </TD> <TD><b>CHANGES_IN_OPERATING_ASSETS_LIABILITIES1</b></TD> <TD><b>CHANGES_IN_OPERATING_ASSETS_LIABILITIES2</b></TD> <TD><b>CHANGES_IN_OPERATING_ASSETS_LIABILITIES3</b></TD> <TD><b>CHANGES_IN_OPERATING_ASSETS_LIABILITIES4</b></TD> </TR> <TR><TD COLSPAN=5>&NBSP;</TD></TR> <TR VALIGN=TOP><TD COLSPAN=5 BGCOLOR='#CCCCCC'><B>Cash flow from investment activities</B></TD></TR> <TR VALIGN=TOP><TD><b>Capital expenditures</B></TD> <TD>CAPITAL_EXPENDITURES1</TD> <TD>CAPITAL_EXPENDITURES2</TD> <TD>CAPITAL_EXPENDITURES3</TD> <TD>CAPITAL_EXPENDITURES4</TD> </TR> <TR VALIGN=TOP><TD><b>Additional investment income</B></TD> <TD>OTHER_NET_AMOUNT1</TD> <TD>OTHER_NET_AMOUNT2</TD> <TD>OTHER_NET_AMOUNT3</TD> <TD>OTHER_NET_AMOUNT4</TD> </TR> <TR><TD><b>Net from investment activities </b> </TD> <TD><b>CASH_FLOW_FROM_INVESTMENT_ACTVITIES1</b></TD> <TD><b>CASH_FLOW_FROM_INVESTMENT_ACTVITIES2</b></TD> <TD><b>CASH_FLOW_FROM_INVESTMENT_ACTVITIES3</b></TD> <TD><b>CASH_FLOW_FROM_INVESTMENT_ACTVITIES4</b></TD> </TR> <TR><TD COLSPAN=5>&NBSP;</TD></TR> </TABLE></TD></TR></TABLE> </CENTER> <BR> <HR SIZE=1> <CENTER><P class=footer> Information and interactive calculators are made available to you as self-help tools for your independent use and are not intended to provide investment advice. We cannot and do not guarantee their applicability or accuracy in regards to your individual circumstances. All examples are hypothetical and are for illustrative purposes. We encourage you to seek personalized advice from qualified professionals regarding all personal finance issues. </P></CENTER><br><br> </BODY> </HTML> "> <H1><CENTER>This Financial Calculator requires SUN's Java"! Plug-in. If you see this message you will need to download SUN's Java"! Plug-in. This can be done automatically by clicking the yellow bar at the top of your browser and choosing  Install ActiveX Control . </CENTER></H1> <OL> You can also get SUN's Java"! Plug-in here: <A href="http://www.java.com/en/download/download_the_latest.jsp" target=_blank><b>Get the Java"! Plug-in!</b></A> <P>For more information about this Plug-in please visit: <A href="http://www.dinkytown.net/money/sunjvm.html" target=_blank><b>SUN's Java"! Plug-in</b></A> <BR>For more information these financial calculators please visit: <A href="http://www.dinkytown.net" target=_blank><b>Financial Calculators from KJE Computer Solutions, LLC</b></A> </OL><!--[if IE]></OBJECT><![endif]--><![if !IE]></APPLET><![endif]> </CENTER><CENTER><SCRIPT>document.write(showbuttons())</SCRIPT> </CENTER> <H1>Definitions</H1><P><TABLE align='center' WIDTH="95%"><TR><TD><DL><!--DEFN_START--> <DT><B>Expected annual growth</B><DD>This is the rate you expect your business to grow. This rate is only used on years 5 and above to estimate your future cash flow.<P> <DT><B>Weighted average cost of capital (WACC)</B><DD>This is the cost of capital, or the interest rate, your investors require to put money into your business. Unless you are a fortune 500 company with an excellent credit rating, this rate should be at least 12% to 25%. For small businesses that rate can be much higher.<P> <DT><B>NPV Value of your business</B><DD>This is the value of all of your future cash flows discounted in today's dollars at your Weighted Average Cost of Capital (WACC).<P> <DT><B>Operating profit</B><DD>This is your total profit before interest and taxes. This is often called Earnings Before Interest and Taxes or EBIT.<P> <DT><B>Interest expense</B><DD>Total interest expense for the year.<P> <DT><B>Interest income</B><DD>Total interest income for the year.<P> <DT><B>Income taxes</B><DD>Total income taxes paid for the year.<P> <DT><B>Depreciation and amortization</B><DD>If you had any depreciation on equipment or land enter those amounts here. They are added back into your cash flow.<P> <DT><B>Change in accounts payable</B><DD>If you had a net change in your accounts payable, enter the change here. If you have an increase in accounts payable, your cash flow goes up. If you have had a decrease in your accounts payable, your cash flow is reduced.<P> <DT><B>Change in inventory</B><DD>If you had a net change in your inventory, enter that amount here. If you are holding more inventory your cash flow is decreased.<P> <DT><B>Change in accounts receivable</B><DD>If you had net change in your accounts receivable, enter that amount here. Reducing your accounts receivable by collecting money owed more quickly can increase your cash flow and your valuation.<P> <DT><B>Changes in operating assets & liabilities</B><DD>Enter any net change in operating assets and liabilities.<P> <DT><B>Other net change</B><DD>Enter any other net change that impacted your cash flow for the period.<P> <DT><B>Capital expenditures</B><DD>This is the amount you spent on capital equipment and land that you were not able to expense for the period. If you were able to expense the expenditure it is already accounted for in your EBIT.<P> <DT><B>Additional investment income</B><DD>Enter any other investment that increased or (decreased) your cash flow for the period. <!--DEFN_END--></DL></TD></TR></TABLE> <BR> <HR SIZE=1> <CENTER> <P class=footer> Information and interactive calculators are made available to you as self-help tools for your independent use and are not intended to provide investment advice. We cannot and do not guarantee their applicability or accuracy in regards to your individual circumstances. All examples are hypothetical and are for illustrative purposes. We encourage you to seek personalized advice from qualified professionals regarding all personal finance issues. </P></CENTER> <BR> </BODY> </HTML>