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1、,Irwin/McGraw-Hill,Chapter 7,Fundamentals of Corporate FinanceThird Edition,Using Discounted Cash Flow Analysis to Make Investment Decisions,Brealey Myers Marcusslides by Matthew Will,Irwin/McGraw-Hill,The McGraw-Hill Companies,Inc.,2001,Topics Covered,Discounted Cash Flows,NetProfitsIncremental Cas
2、h FlowsTreatment of InflationSeparation of Investment&Financing DecisionsExample:Blooper Industries,Cash Flow vs.Accounting Income,Discount actual cash flowsUsing accounting income,rather than cash flow,could lead to erroneous decisions.,ExampleA project costs$2,000 and is expected to last 2 years,p
3、roducing cash income of$1,500 and$500 respectively.The cost of the project can be depreciated at$1,000 per year.Given a 10%required return,compare the NPV using cash flow to the NPV using accounting income.,Cash Flow vs.Accounting Income,Cash Flow vs.Accounting Income,Incremental Cash Flows,Discount
4、 incremental cash flowsInclude All Indirect EffectsForget Sunk CostsInclude Opportunity CostsRecognize the Investment in Working CapitalBeware of Allocated Overhead Costs,Incremental Cash Flows,IMPORTANTAsk yourself this questionWould the cash flow still exist if the project does not exist?,If yes,d
5、o not include it in your analysis.If no,include it.,Inflation,INFLATION RULEBe 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,In
6、flation,ExampleYou 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,Separati
7、on 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,(,000s),Blooper Industries,Cash Flow From Operations(,000s),or$3,950,000,Blooper Industries,Net Cash Flow(entire project)(,000s),NPV 12%=$3,564,000,
