lecture7Using Discounted Cash Flow Analysis to Make Investment Decisions(廖咸与).ppt

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lecture7Using Discounted Cash Flow Analysis to Make Investment Decisions(廖咸与).ppt

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lecture7Using Discounted Cash Flow Analysis to Make Investment Decisions(廖咸与)

Topics Covered Discounted Cash Flows, NetProfits Incremental Cash Flows Treatment of Inflation Separation of Investment Financing Decisions Example: Blooper Industries Cash Flow vs. Accounting Income Discount actual cash flows Using accounting income, rather than cash flow, could lead to erroneous decisions. Incremental Cash Flows Discount incremental cash flows Include All Indirect Effects Forget Sunk Costs Include Opportunity Costs Recognize the Investment in Working Capital Beware of Allocated Overhead Costs Incremental Cash Flows IMPORTANT Ask yourself this question Would the cash flow still exist if the project does not exist? Inflation INFLATION RULE Be consistent in how you handle inflation!! Use nominal interest rates to discount nominal cash flows. Use real interest rates to discount real cash flows. You will get the same results, whether you use nominal or real figures Inflation Example You own a lease that will cost you $8,000 next year, increasing at 3% a year (the forecasted inflation rate) for 3 additional years (4 years total). If discount rates are 10% what is the present value cost of the lease? Inflation Example - nominal figures Inflation Example - real figures Separation of Investment Financing Decisions When valuing a project, ignore how the project is financed. Following the logic from incremental analysis ask yourself the following question: Is the project existence dependent on the financing? If no, you must separate financing and investment decisions. Blooper Industries Blooper Industries Cash Flow From Operations (,000s) Blooper Industries Net Cash Flow (entire project) (,000s) The McGraw-Hill Companies, Inc.,2001 7- * Irwin/McGraw-Hill Irwin/McGraw-Hill Chapter 7 Fundamentals of Corporate Finance Third Edition Using Discounted Cash Flow Analysis to Make Investment Decisions Brealey Myers Marcus slides by Matthew Will Irwin/McGraw-Hill The McGraw-Hill Companies, Inc.,2001 Example A project costs $2,000 and is expected to las