Everybody has a go-to juice shop where they consistently get shakes and juices, but have you ever wondered how much that company is worth?🤔
Let's understand this🏮
For our juice business, let's estimate its daily sales. Remember, cash is king, and future cash flows are key to valuation.
First, we estimate the daily sales of our juice and shake business.
Assume it operates 12 hours daily, with an average sale of Rs. 500 per hour. That gives us Rs. 6,000 in daily revenue.
Now, projecting annual cash flows. Multiply daily revenue by operating days in a year. Let's assume 300 operating days, giving us an annual revenue of Rs. 1,800,000.
To get Free Cash Flow, subtract operating expenses, taxes, and capital expenditures from revenue.
Assume Rs. 800,000 in expenses, Rs. 200,000 in taxes, and Rs. 50,000 in capex, resulting in FCF of Rs. 750,000
Now, let's factor in risk. The discount rate accounts for the time value of money and business risk.
Assume a 10% discount rate for our juice business. Discount future cash flows to present value using the discount rate.
For simplicity, let's consider a 5-year projection. The present value of our annual FCF would be calculated for each year.
Sum up the present values of each year's cash flows. This gives us the total present value, representing the intrinsic value of our juice business
Now, let's crunch the numbers. Assuming Rs. 6,000 daily revenue, Rs. 750,000 Free Cash Flow, and a 10% discount rate over 5 years, the DCF valuation for our juice business is approximately Rs. 2,842,691.94
So, here you get the valuation of a business using a technique called DIscounted Cash Flow (DCF). Isn't it easy?
But wait!!
Valuing a business is a blend of science and art. DCF provides a solid framework, but real-world dynamics require adaptability. Use it as a tool, not a crystal ball
That's it for today, I hope you understood the concept. If you want to learn it more in depth and practically, Read external sources available!!
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