19 December 2006

R/V Platform and cash flow based risk-adjusted discount rates

An example of the versatility of the R/V Platform as a general risk and valuation analysis environment is the estimation of business unit specific risk-adjusted discount rates. Such discount rates have important applications in IFRS 36 value in use calculations, as investment hurdle rates and in making e.g. financial sector fee based businesses comparable in terms of value creation with transaction and position holding based businesses.

CDFT has developed an approach, tightly based on academic and practitioners' modelling principles, which intensively utilizes the computational functionalities of the R/V Platform. In the approach historical and forecasted cash flows of business units are used to produce the stochastic models of the future cash flows. The cash flow models are simulated a large number of times. Feasible risk-adjusted discount rates are determined such that the Net Present Value distributions of the business units fulfil certain criteria.

The risk-adjusted discount rates obtained using the procedure can be and are applied by existing customers in various valuation cases, including the impairment testing of the IFRS 36 and M&A and divestment analyses, and in investment calculations.

When risk-adjusted discount rates are determined simultaneously for all divisions and business units of a group using this procedure, rather large and complex simulation models are typically needed. In actual cases of large globally operating corporations, simulation models involving hundreds of risk factors have been used. Such studies cannot easily be executed in end-user applications, while at the same time requiring high quality and reliable results. Industry strength technology such as the R/V Platform provide a natural system environment to carry out such demanding and important tasks.

For further details please contact sales@cdgroup.fi.