The Discount Cash Flow (DCF) method is not only dependable, with its fair market value principles, but isit is also one of the most extensively used applications of the income-based valuation approach. However, withdue to the DCF method’s ability to cause various potential outcomes leading to uncertainty and, therefore, risk, recent decisions on damage claims in investment arbitration left tribunals yearning to lessen variability in outcomes, drawing focus on traditional DCF methods.
With the number of increasing numbers ofnumber in multifaceted projects, tribunals have been presented with valuation methods that seek to reconcile DCF with easier approaches to risk - known as “real option valuation,” which have proven to be successsuccessful in recent cases such as Tethyan Copper and Bear Creek. The real option framework can therefore provide a more complete picture of the value and its drivers to parties assessing the value lostloss as a result of liable actions.
Within this White Paperwhite paper, sarahSarah explores the key conducts in which real option models can help the analysis and accuracy of risk in DCF models causing less uncertainty. They also further convey how discount factor, managerial flexibility, and the different implementation tools of real options models, such as tree and simulation models, are seen as a means to increase the confidence in traditional DCF methods rather than adding intricacy, and consequently putting the focus on the internal consistency of assumptions regarding future scenarios and the lower dispersion of the products they might deliver.