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Essay / Research Paper Abstract
This 4-page paper examines the fictitious company of Trebor Pharmaceuticals. The paper discusses discounted cash flow and the impact of equipment upgrades on such cash flow. Bibliography lists 3 sources.
Page Count:
4 pages (~225 words per page)
File: D0_MTtrebor.rtf
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Unformatted sample text from the term paper:
replacement), especially because technology is making equipment more obsolete at a faster rate of speed than ever in the past. But what is not often analyzed is the actual costs
of either replacement or repair/maintenance. In this paper, well try to examine what one drug manufacturer needs to do in order to make the decision of whether to replace or
maintain its current capital and equipment structure. The financial managers at Trebor Pharmaceutical, a fictitious drug company, are trying to make some
capital budgeting choices between upgrading high-technology research equipment and continuing to use the equipment already in place. This paper will examine two issues: first, how discounted cash flow models would
be used in the decision-making process and what the impact of not replacing equipment would have on future operating cash flows. In
order to discuss the first issue, its important to focus on the use of the discounted cash flow model. Like many similar models, the discounted cash flow model (also known
as DCF) is used to help measure a companys shareholder value (Johnson, 2002-2003). In its most basic form, shareholder value is created when discretionary cash flow to shareholders generated from
invested equity is larger than the required equity rate of return (Johnson, 2002-2003). The DCF method is used when prospective discretionary cash flows to shareholders (in other words predicted cash
flows) are discounted at the required rate of return on equity (Johnson, 2002-2003). In Trebors case, if financial managers were to use
DCF, they would need to analyze potential return on equity (or investment) to shareholders if they were to upgrade the equipment, versus relying on the current equipment and holding it
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