According to the current discussion question, I have been selected by AECOM to define a model for assessing financial viability for the next year; since AECOM is a publicly traded company, I will use the discounted cash flow (DCF) model, as this model is based primarily on the amount of money expected in the future, since I also did not study this model in the previous discussion.
Discounted Cash Flow (DCF) Model
According to CFI (n.d.), this model attempts to find the value of today's investment based on expectations of how much money the company will receive. When asked about the importance of this model for AECOM, I will reply to French and Gabrielli (2005); this model helps the company's decision-makers make the appropriate decisions regarding the capital budget or operating expenses.
Content and Data
When considering the current model of AECOM (FMP, 2022):
It takes at least the executive yeamodelbuild I to analyze the present value of future cash flows using the discount rate. The present value is estimated by calculating whether the discounted cash flow is higher or lower than the investment's present value. This model works on the time value of money, such that a dollar today is worth more than a dollar tomorrow (Kruschwitz & Löffler, 2006).
Based on my experience, AECOM is doing well after its big stumble in 2020. This is because construction work was halted due to the COVID-19 pandemic.
Conclusion
Goals and Outcomes from the use of the DCF model that it is possible to evaluate the business and know the value of bonds, stocks, or anything that has an impact on the cash flow of the company, but the disadvantage of this model is that it requires making many assumptions that are not true in all cases, also, future cash flows can be estimated at a higher value than their actual value, which leads to a higher investment cost. Therefore, to prepare this model, a great deal of experience is required to know the cash flows closer to the truth and avoid missing, taking advantage of the opportunity (Jennergren, 2011).
References
CFI (n.d.). Types of Financial Models.
https://corporatefinanceinstitute.com/resources/knowledge/modeling/types-of-financial-models/
French, N., & Gabrielli, L. (2005). Discounted cash flow: accounting for uncertainty. Journal of Property Investment &
Finance, 23(1), 75-89.
FMP. (2022). AECOM Discounted Cash Flow Model.
https://site.financialmodelingprep.com/discounted-cash-flow-model/ACM
Jennergren, L. P. (2011). A tutorial on the discounted cash flow model for valuation of companies. SSE/EFI Working paper
series in business administration, (1998), 1.
Kruschwitz, L., & Löffler, A. (2006). Discounted cash flow: a theory of the valuation of firms. John Wiley & Sons