Valuation Engine Overview
This article explains how the valuation engine in Model Reef works.
You will learn:
What inputs the valuation engine uses.
How it converts cashflows into NPV, IRR and money multiple.
How it treats FCFF and FCFE.
How discount rates and terminal values are applied.
The valuation engine runs per scenario. Each scenario is a separate model with its own valuation outputs.
What the valuation engine uses as inputs
For a given model or scenario, the valuation engine uses:
Forecast cashflows
Derived from the Cash Waterfall and Cashflow Statement.
Can be used as FCFF or FCFE depending on configuration.
Discount rates
Weighted Average Cost of Capital (WACC) for FCFF.
Equity discount rate for FCFE.
Terminal value assumptions
Multiple based method.
Gordon growth method for equity cashflows.
Purchase price or entry equity (optional)
Used to compute IRRs and money multiples.
All of these inputs are scenario specific.
FCFF and FCFE inside the engine
You can value the business using either:
Free cashflow to the firm (FCFF)
Cashflow available to both debt and equity holders before financing flows.
Discounted at WACC to obtain enterprise value.
Free cashflow to equity (FCFE)
Cashflow available to equity holders after debt service and debt movements.
Discounted at the equity discount rate to obtain equity value.
Model Reef computes FCFF and FCFE from the same underlying forecast but with different adjustments for debt and equity flows.
Discounting framework
The engine applies a time value of money framework consistent with Excel XNPV and XIRR style functions.
Key rules:
Actual dates or model periods determine discount factors.
Cashflows can be uneven over time.
Discounting respects the model's chosen periodicity.
FCFF uses WACC. FCFE uses the equity discount rate.
The result is a set of present values for each cashflow, including the terminal value, which are then summed to derive NPV.
Terminal value in the engine
The engine supports two terminal value approaches:
Multiple method
Apply a chosen multiple to a trailing or forward metric at the end of the forecast, such as EBITDA or FCFE.
Gordon growth method
Apply a constant growth rate to FCFE and a constant discount rate to derive a perpetuity value.
In both cases the terminal value is treated as a cashflow in the final period and then discounted back to the present.
Valuation outputs produced
For each scenario, the valuation engine produces:
Enterprise and equity NPV.
Project IRR and equity IRR.
Money multiple on equity.
Payback period (time to recover initial equity).
Terminal value size and share of total value.
These outputs can be placed into dashboards, reports and scenario comparisons.
Scenario based workflow
Because each scenario is a separate model, you can:
Use different discount rates in each scenario.
Change terminal value methods or assumptions per scenario.
Compare NPV, IRR and money multiple across scenarios.
Use one scenario as a base case and others as upside or downside cases.
The valuation engine recomputes automatically whenever assumptions or cashflows change.
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