Chapter5DiscountedCashFlowValuation：5章现金流量折现法

1、Chapter 12: Cash Flow Estimation and Risk AnalysisI. Identifying the Relevant Cash FlowsA. Project cash flow versus accounting income- Cash flow - net in come or profit: Projects should be judged on their effect on cash flows. Net in come con siders acco un ti ng conven ti ons and financing which ar

2、e un related to a project.- Net in come can be adjusted for these non-cash items to find the cash flow for a firm. (Stateme nt of Cash Flows)B. Rules to Follow:1. Con sider only the cash flows that occur as a direct result of accept ing the project.- Ignore sunk costs.- Con sider the opport unity co

3、st of assets being used.- In clude side effects (erosi on, cann ibalism).2. For replaceme nt projects, focus solely on the cha nges in cash flows.3. Ignore financing (in terest costs); focus on operat ing cash flows.4. Focus on after tax cash flows!5. Include changes in net working capital as a cost

4、 in any period that it may occur. Additi on (reducti on) to NWC is a n egative (positive) cash flow.CThe three-stage approach to estimating project cash flows:1. Initial Investment Outlay: Usually negative- All initial costs necessary to bring a project up and running- Any changes in net working cap

5、ital (cash, AR, inventory)- Opport unity costs (alter native use for buildi ng, la nd, etc.)- If it s a replacement project, you must consider:* Salvage (sale of old asset)* Tax con seque nces of sale (book value vs selli ng price)2. Operating cash flows Net cash flows during project s life- All aft

6、er-tax cash flows from operati ons- Additi onal cha nges in net work ing capital- If a replaceme nt project: annual adjustme nt to depreciati on3. Terminal year cash flows Final year adjustments- Cash flows other tha n from operati ons- Salvage (sale of new asset at the end of its life)- Recovery an

7、d reclamati on of property (e.g. strip mi ning)- Recovery of in vestme nt in net worki ng capitalD. A Closer Look at Net Working CapitalHow Changes in NWC Affect Cash Flow:An in crease in any curre nt asset (+NWC) is a cash outflow (-Cash) A decrease in any curre nt asset (-NWC) is a cash inflow (+C

8、ash) An in crease in any curre nt liability (-NWC) is a cash in flow (+Cash) A decrease in any curre nt liability (+NWC) is a cash outflow (-Cash)Cash outflow (- cash)+ Inven toryCash inflow (+ cash)-Inven tory+ Accounts Receivable (AR)-AR+ Prepaid expe nses-Prepaid expe nses+ Buffer cash (cash on h

9、and)-Buffer cash-Wages due+Wages due-Accou nts Payable (AP)+AP-Notes Payable (NP)+NP-Deferred in come taxes+Deferred in come taxesChanges in Net Working Capital (NWC)- May occur in the in itial in vestme nt year- May occur in subseque nt years- All must be reversed in the termi nal yearWhy account f

10、or Net Working Capital?- In creases in work ing capital tie up resources- These resources could be in vested in other assets- We n eed to acco unt for the time value of money tied up- We recoup those assets at the end of the projects lifeFin 335, Chapter 12 page 16II. Project Cash Flow Example:Expan

11、sion Project (2002-2006) (See Supplements, Table 12.3 Parts 1-5)1. Initial investment cash flow:$12,000$8,000$6,000Cost of building (2002)Cost of Equipme nt (2002)In crease in NWC (2002)Total initial investment (2002):$26,000Year 1:Y ear 2:Sales Reve nue$60,000$61,200Operati ng CostsVariable42,00042

12、,840Fixed8,0008,080Total50,00050,920Depreciati onBuildi ng156312Equipme nt1,6002,560Total1,7562,872EBIT8,2447,408Taxes(.40)3,2982,963Net In come4,9464,445Operat ing Cash Flow6,7027,317In vestme nt in NWC(120)(122)Total Net Cash Flow$6,582$7,1952. Annual cash flows during project : s lifeetc.3. Termi

13、nal year cash flows (2006):Recapture of NWC:$6,367After-tax salvage value:Buildi ng Equipme ntTotal salvage$8,863$1,744$10,607Total terminal year cash flow $16,974Salvage for Building:Selling PriceLess book valueProfit (loss) on saleTaxes on profit (loss) (.40)After-tax salvage value$7,500*-10,908(3

14、,408)-(1,363)*$8,863Easy formula for after-tax salvage value: SP - (SP BV)t$7,500 ($7,500 - $10,908).40 = $8,863Selling Price$2,000Less book value-1,360Profit (loss) on sale640Taxes on profit (loss) (.40)-256*After-tax salvage value$1,744Salvage for Equipment:$2,000 (.40)($2,000 - $1,360) =$1,744Ill

15、 Modified Accelerated Cost Recovery System for DepreciationY earDepreciati on rate for recovery period3-year5-year7-year133.33%20.00%14.29%244.4532.0024.49314.8119.20仃.4947.4111.5212.49511.528.9365.768.9278.9384.46MACRS Depreciation:* Assig n asset to appropriate asset-class (3-year, 5-year, etc)* M

16、ultiple perce ntage from table by the depreciable basis* Depreciate that amount each year of the asset s lifeExample: A 7-year asset with a $50,000 depreciable basisY ear1:Depreciate asset by $50,000 x .1429 = $7,145Y ear2:Depreciate asset by $50,000 x .2449 = $12,245Straight-line Depreciation:* Div

17、ide the cost by the nu mber of years over which asset will be depreciated to arrive at annual depreciati on* Reduce book value each year by the annual depreciationIV.What-If Analysis*Helps identify how much risk exists in NPV forecastsSeen ario an alysis looks at base case, worst case, and best case

18、*Sen sitivity an alysis cha nges a sin gle variable at a timeA. Scenario Analysis:All in put variables and their in teracti onThe three possible outcomes are:Base case:Most likely outcomeWorst case:Pessimistic outcomeBest case:Optimistic outcomeThe three possible values for each in put variable are:

19、Base case:Most likely outcomeUpper bound:Highest valueLower bound:Lowest values dema nd, selli ng price, variable cost and fixed cost areExample: Water T-Ball ManufacturingUPPERBASELOWERDema nd (Q)500,000300,000150,000Price (P)$42.0033.5024.00Variable Cost (VC)$18.5015.0012.50Fixed Cost (FC)$1MILL77

20、5,000500,000Estimates for first year provided below:Profit: Q (P-VC) FCBASE CASE:300,000(33.50 15) -775,000 = $4,775,000BEST CASE:500,000(42.00 12.50) -500,000 = $14,250,000WORST CASE:150,000(24.00 -18.50) -1,000,000 = ($ 175,000)B Sensitivity Analysis:Each in put variable is exam ined separatelyThe

21、 three possible values for each in put variable are:Base case:Most likely outcomeUpper bound:Highest valueLower bound:Lowest valueUPPERBASELOWERDema nd (Q)500,000300,000150,000Price (P)$42.0033.5024.00Variable Cost (VC)$18.5015.0012.50Fixed Cost (FC)$1MILL775,000500,000Example: Water T-Ball Manufact

22、uringProfit: Q (P-VC) FCBeg inning with BASE CASE figures, cha nge one variable at a time to see how sen sitive profit is to that particular variableBASE CASE:300,000(33.50 15) -775,000 = $4,775,000Q Sen sitivity:1. 500,000(33.502. 150,000(33.50-15) 775,000 = $8,475,000 Best case-15) 775,000 = $2,00

23、0,000 Worst caseP Sen sitivity:1. 300,000(42.002. 300,000(24.00-15) 775,000 = $7,325,000 Best case-15) 775,000 = $1,925,000 Worst caseVC Sen sitivity:1. 300,000(33.50 T2.50) -775,000 = $5,525,0002. 300,000(33.50 T8.50) -775,000 = $3,725,000Best caseWorst caseC. Decision Trees:-Decision trees are too

24、ls for making decisions where a lot of complexinformation needs to be taken into account.-They provide a structure in which sequential decisions can be laid downand evaluated.- Gathering and evaluating information at different stages can reduce uncertainty surrounding the investment decision.1.Drawi

25、ng a Decision Tree:-Start with a decision that needs to be made. Represent this as thestarting point (node) on the tree (the origin).- Working from left to right, draw lines to represent:a. Decisions (test- don t test, inve-sdton t invest)b. Or outcomes of those decisions (information received)-Deci

26、sions and outcomes can lead to further decisions.a.Assign costs/benefits to decisionsb.Assign probabilities to outcomesc. Work from right to left, combine cost/benefits with probabilitiesto arrive at an expected value for the decision at the origin.Example 1. Wild Cat Drilling Well: A Two-Period Dec

27、ision (r=.1O)Drill well for $20mSuccess(20%)t=0t=1Failure(80%)Don t drillNPV (t=2) In vest $100m $200M-t=1；$0Don t investIn vest $100m $25M_ t=1;$0 Don t invest$0Decisio ns:t drill. Cost = $20m.(t=0) Drill an exploratory well; or don(t=1) In vest in further producti on capacity give n the outcome of

28、 the exploratory well; or don t in vest. Cost = $100m.Outcomes:(t=1) Success or failure of the exploratory well.(t=2) NPV from in vestme nt in producti on capacity.Evaluating Wild Cat Drilling Well:A successful exploratory well promises a $30M perpetuity from t=1.NPVt=i = $30m/.1 - $100m = $300m -$1

29、00m = $200mAn unsuccessful exploratory well promises a $7.5M perpetuity.NPVt=1 = $7.5m/.1 - $100m = $75m -$100m = -$25mProbability of a successful exploratory well = .20Probability of an unsuccessful exploratory well = .80If the exploratory well is unsuccessful, the company will not invest further, since the NPV is -$25m. Thus the present value of cash inflows to be expected is:PVCIFPVCOF(.20 x $200m/1.1) + (.8 x 0)$36.36m $20m (The cost of the exploratory well)E(NPVt=0)=$36.36m -$20m = $16.36mDecision:Invest in exploratory well since th