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DCF Valuation of a Desert Water Well

The document discusses using a discounted cash flow model to value a water well that produces $1.50 per day indefinitely. It explains building a spreadsheet model to calculate the present value of the daily cash flows, discounted at 15%, to determine the well's worth.

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Chandan Das
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44 views5 pages

DCF Valuation of a Desert Water Well

The document discusses using a discounted cash flow model to value a water well that produces $1.50 per day indefinitely. It explains building a spreadsheet model to calculate the present value of the daily cash flows, discounted at 15%, to determine the well's worth.

Uploaded by

Chandan Das
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

BASIC PRINCIPLES OF

FINANCIAL VALUATION
DISCOUNTING
DCF Practical Example
James P. Weston
Professor of Finance
The Jones School, Rice University
DCF PRACTICAL EXAMPLE

A water well in the desert. How much is


it worth to sell or acquire?

If the well is dry?

Connected to an active source of water?


DCF PRACTICAL EXAMPLE:
WATER WELL

How much water is there?


Infinite
How much does it produce?
1 gallon/day
How much cash flow?
Net $1.50/day
Can we put a realistic price on this asset?
DCF PRACTICAL EXAMPLE:
WATER WELL
0 1 2 3 4 5 … ∞

$1.50 $1.50 $1.50 $1.50 $1.50 $1.50

Problem: Is it worth infinity?


Remember:
$100

$50

$0
0 5 10 15 20 25 30 35 40 45 50
DCF PRACTICAL EXAMPLE:
WATER WELL
Discount rate: 15%

Build a spreadsheet model

„ Step 1: What are the cash flows


„ Step 2: What are they worth today?
„ Step 3: Add up the present values

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