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

Tinbergen Institute Working Paper No. 2002-083/1

17 Pages Posted: 13 Dec 2002

See all articles by Mehari Mekonnen Akalu

Mehari Mekonnen Akalu

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE); Erasmus Research Institute of Management (ERIM)

John Rodney Turner

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE); Erasmus Research Institute of Management (ERIM)

Date Written: August 9, 2002

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.

Keywords: Capital budgeting, Investment appraisal, DCF methods, Project Analysis, Shareholder Value Analysis, Value Management Techniques

JEL Classification: G30, G31, L6, L8, L9, M10, O22, O32

Suggested Citation

Mekonnen Akalu, Mehari and Turner, John Rodney, A Monte Carlo Comparison between the Free Cash Flow and Discounted Cash Flow Approaches (August 9, 2002). Tinbergen Institute Working Paper No. 2002-083/1, Available at SSRN: https://ssrn.com/abstract=324842 or http://dx.doi.org/10.2139/ssrn.324842

Mehari Mekonnen Akalu (Contact Author)

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

Burgemeester Oudlaan 50
3062 PA Rotterdam, NL 3062 PA
Netherlands
+31 10 408 8943 (Phone)
+31 10 408 9031 (Fax)

Erasmus Research Institute of Management (ERIM)

P.O. Box 1738
3000 DR Rotterdam
Netherlands

John Rodney Turner

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

Burgemeester Oudlaan 50
3062 PA Rotterdam, NL 3062 PA
Netherlands

Erasmus Research Institute of Management (ERIM)

P.O. Box 1738
3000 DR Rotterdam
Netherlands

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