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The present value of the cash flows could then be calculated.
Benefits of using this method are that it takes into account the growth potential of the business. The assessment obtained is also based on timing and size of cash flows and risks involved. They directly relate to the debt servicing ability of the firm and hence the amount that should be lent by the bank.
The shortcoming of using this method is that it is grounded on expectations on productivity, threats and market circumstances. The extreme hypothesis is that the workshop test could be altered to a mass plant engineering process. From the data offered, there is no material on how statistics on the balance sheet or the discount rate were arrived at or rules behind the figures.
A liquidation value could be obtained from these assets and used in deciding the amount of the loan. This curtails the risk for the bank as very few assumptions are made. It also avoids the difficulty and risks in including a value for intangibles (Brigham and Daves, 2010). The drawback of using this method is that it disregards the growth potential of the firm. The key value of Electro-Technology Corporations is the potential of capitalisation of its patented rights.
The tactic here involves adjusting the book values for market values for all assets and liabilities on the balance sheet. Intangible assets not included in the balance sheet are added onto the net market value to obtain the adjusted tangible book value (Brigham and Daves, 2010). This may give a fairer value of the companys worth. In addition, it includes intangibles such as patent, which is a significant component of Electro-Technology Corporation assets.
The drawback of this process is that intangibles are hard to value. The value of the patent that Electro-Technology Corporation owns lies in its contribution to the firms growth potential. However, there is great subjectivity involved in valuing the patent. The adjusted tangible
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