Chapter 5 Discounted Cash Flow Valuation5章现金流量折现法.docx

Chapter 5 Discounted Cash Flow Valuation5章现金流量折现法.docx

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Chapter5DiscountedCashFlowValuation5章现金流量折现法

Chapter12:

CashFlowEstimationandRiskAnalysis

I.IdentifyingtheRelevantCashFlows

A.Projectcashflowversusaccountingincome

-Cashflownetincomeorprofit:

Projectsshouldbejudgedontheireffectoncashflows.Netincomeconsidersaccountingconventionsandfinancingwhichareunrelatedtoaproject.

-Netincomecanbeadjustedforthesenon-cashitemstofindthecashflowforafirm.（StatementofCashFlows）

B.RulestoFollow:

1.Consideronlythecashflowsthatoccurasadirectresultofacceptingtheproject.

-Ignoresunkcosts.

-Considertheopportunitycostofassetsbeingused.

-Includesideeffects（erosion,cannibalism）.

2.Forreplacementprojects,focussolelyonthechangesincashflows.

3.Ignorefinancing（interestcosts）;focusonoperatingcashflows.

4.Focusonaftertaxcashflows!

5.Includechangesinnetworkingcapitalasacostinanyperiodthatitmayoccur.Addition（reduction）toNWCisanegative（positive）cashflow.

C.Thethree-stageapproachtoestimatingprojectcashflows:

1.InitialInvestmentOutlay:

Usuallynegative

-Allinitialcostsnecessarytobringaprojectupandrunning

-Anychangesinnetworkingcapital（cash,AR,inventory）

-Opportunitycosts（alternativeuseforbuilding,land,etc.）

-Ifit’sareplacementproject,youmustconsider:

*Salvage（saleofoldasset）

*Taxconsequencesofsale（bookvaluevssellingprice）

2.Operatingcashflows:

Netcashflowsduringproject’slife

-Allafter-taxcashflowsfromoperations

-Additionalchangesinnetworkingcapital

-Ifareplacementproject:

annualadjustmenttodepreciation

3.Terminalyearcashflows:

Finalyearadjustments

-Cashflowsotherthanfromoperations

-Salvage（saleofnewassetattheendofitslife）

-Recoveryandreclamationofproperty（e.g.stripmining）

-Recoveryofinvestmentinnetworkingcapital

D.ACloserLookatNetWorkingCapital

HowChangesinNWCAffectCashFlow:

Anincreaseinanycurrentasset（+NWC）isacashoutflow（-Cash）

Adecreaseinanycurrentasset（-NWC）isacashinflow（+Cash）

Anincreaseinanycurrentliability（-NWC）isacashinflow（+Cash）

Adecreaseinanycurrentliability（+NWC）isacashoutflow（-Cash）

Cashoutflow（-cash）Cashinflow（+cash）

+Inventory-Inventory

+AccountsReceivable（AR）-AR

+Prepaidexpenses-Prepaidexpenses

+Buffercash（cashonhand）-Buffercash

-Wagesdue+Wagesdue

-AccountsPayable（AP）+AP

-NotesPayable（NP）+NP

-Deferredincometaxes+Deferredincometaxes

ChangesinNetWorkingCapital（NWC）

-Mayoccurintheinitialinvestmentyear

-Mayoccurinsubsequentyears

-Allmustbereversedintheterminalyear

WhyaccountforNetWorkingCapital?

-Increasesinworkingcapitaltieupresources

-Theseresourcescouldbeinvestedinotherassets

-Weneedtoaccountforthetimevalueofmoneytiedup

-Werecoupthoseassetsattheendoftheprojectslife

II.ProjectCashFlowExample:

ExpansionProject（2002-2006）（SeeSupplements,Table12.3Parts1-5）

1.Initialinvestmentcashflow:

-$12,000Costofbuilding（2002）

-$8,000CostofEquipment（2002）

-$6,000IncreaseinNWC（2002）

Totalinitialinvestment（2002）:

$26,000

2.Annualcashflowsduringproject’slife:

Year1:

Year2:

etc.

SalesRevenue$60,000$61,200

OperatingCosts

Variable42,00042,840

Fixed8,0008,080

Total50,00050,920

Depreciation

Building156312

Equipment1,6002,560

Total1,7562,872

EBIT8,2447,408

Taxes（.40）3,2982,963

NetIncome4,9464,445

OperatingCashFlow6,7027,317

InvestmentinNWC（120）（122）

TotalNetCashFlow$6,582$7,195

3.Terminalyearcashflows（2006）:

RecaptureofNWC:

$6,367

After-taxsalvagevalue:

Building$8,863

Equipment$1,744

Totalsalvage$10,607

Totalterminalyearcashflow$16,974

SalvageforBuilding:

SellingPrice$7,500*

Lessbookvalue-10,908

Profit（loss）onsale（3,408）

Taxesonprofit（loss）（.40）-（1,363）*

After-taxsalvagevalue$8,863

Easyformulaforafter-taxsalvagevalue:

SP-（SP–BV）t

$7,500–（$7,500-$10,908）.40=$8,863

SalvageforEquipment:

SellingPrice$2,000*

Lessbookvalue-1,360

Profit（loss）onsale640

Taxesonprofit（loss）（.40）-256*

After-taxsalvagevalue$1,744

$2,000–（.40）（$2,000-$1,360）=$1,744

III.ModifiedAcceleratedCostRecoverySystemforDepreciation

Year

Depreciationrateforrecoveryperiod

3-year

5-year

7-year

1

33.33%

20.00%

14.29%

2

44.45

32.00

24.49

3

14.81

19.20

17.49

4

7.41

11.52

12.49

5

11.52

8.93

6

5.76

8.92

7

8.93

8

4.46

MACRSDepreciation:

∙Assignassettoappropriateasset-class（3-year,5-year,etc）

∙Multiplepercentagefromtablebythedepreciablebasis

∙Depreciatethatamounteachyearoftheasset’slife

Example:

A7-yearassetwitha$50,000depreciablebasis

Year1:

Depreciateassetby$50,000x.1429=$7,145

Year2:

Depreciateassetby$50,000x.2449=$12,245

Straight-lineDepreciation:

∙Dividethecostbythenumberofyearsoverwhichassetwillbedepreciatedtoarriveatannualdepreciation

∙Reducebookvalueeachyearbytheannualdepreciation

IV.What-IfAnalysis

*HelpsidentifyhowmuchriskexistsinNPVforecasts

*Scenarioanalysislooksatbasecase,worstcase,andbestcase

*Sensitivityanalysischangesasinglevariableatatime

A.ScenarioAnalysis:

Allinputvariablesandtheirinteraction

Thethreepossibleoutcomesare:

Basecase:

Mostlikelyoutcome

Worstcase:

Pessimisticoutcome

Bestcase:

Optimisticoutcome

Thethreepossiblevaluesforeachinputvariableare:

Basecase:

Mostlikelyoutcome

Upperbound:

Highestvalue

Lowerbound:

Lowestvalue

Example:

WaterT-BallManufacturing

Estimatesforfirstyear’sdemand,sellingprice,variablecostandfixedcostareprovidedbelow:

UPPERBASELOWER

Demand（Q）500,000300,000150,000

Price（P）$42.0033.5024.00

VariableCost（VC）$18.5015.0012.50

FixedCost（FC）$1MILL775,000500,000

Profit:

Q（P-VC）–FC

BASECASE:

300,000（33.50–15）–775,000=$4,775,000

BESTCASE:

500,000（42.00–12.50）–500,000=$14,250,000

WORSTCASE:

150,000（24.00–18.50）–1,000,000=（$175,000）

B.SensitivityAnalysis:

Eachinputvariableisexaminedseparately

Thethreepossiblevaluesforeachinputvariableare:

Basecase:

Mostlikelyoutcome

Upperbound:

Highestvalue

Lowerbound:

Lowestvalue

Example:

WaterT-BallManufacturing

UPPERBASELOWER

Demand（Q）500,000300,000150,000

Price（P）$42.0033.5024.00

VariableCost（VC）$18.5015.0012.50

FixedCost（FC）$1MILL775,000500,000

Profit:

Q（P-VC）–FC

BeginningwithBASECASEfigures,changeonevariableatatimetoseehowsensitiveprofitistothatparticularvariable

BASECASE:

300,000（33.50–15）–775,000=$4,775,000

QSensitivity:

1.500,000（33.50–15）–775,000=$8,475,000Bestcase

2.150,000（33.50–15）–775,000=$2,000,000Worstcase

PSensitivity:

1.300,000（42.00–15）–775,000=$7,325,000Bestcase

2.300,000（24.00–15）–775,000=$1,925,000Worstcase

VCSensitivity:

1.300,000（33.50–12.50）–775,000=$5,525,000Bestcase

2.300,000（33.50–18.50）–775,000=$3,725,000Worstcase

C.DecisionTrees:

-Decisiontreesaretoolsformakingdecisionswherealotofcomplexinformationneedstobetakenintoaccount.

-Theyprovideastructureinwhichsequentialdecisionscanbelaiddownandevaluated.

-Gatheringandevaluatinginformationatdifferentstagescanreduceuncertaintysurroundingtheinvestmentdecision.

1.DrawingaDecisionTree:

-Startwithadecisionthatneedstobemade.Representthisasthestartingpoint（node）onthetree（theorigin）.

-Workingfromlefttoright,drawlinestorepresent:

a.Decisions（test-don’ttest,invest-don’tinvest）

b.Oroutcomesofthosedecisions（informationreceived）

-Decisionsandoutcomescanleadtofurtherdecisions.

a.Assigncosts/benefitstodecisions

b.Assignprobabilitiestooutcomes

c.Workfromrighttoleft,combinecost/benefitswithprobabilitiestoarriveatanexpectedvalueforthedecisionattheorigin.

Example1.WildCatDrillingWell:

ATwo-PeriodDecision（r=.10）

-Decisions:

（t=0）Drillanexploratorywell;ordon’tdrill.Cost=$20m.

（t=1）Investinfurtherproductioncapacitygiventheoutcomeoftheexploratorywell;ordon’tinvest.Cost=$100m.

-Outcomes:

（t=1）Successorfailureoftheexploratorywell.

（t=2）NPVfrominvestmentinproductioncapacity.

EvaluatingWildCatDrillingWell:

Asuccessfulexploratorywellpromisesa$30Mperpetuityfromt=1.

NPVt=1=$30m/.1-$100m=$300m–$100m=$200m

Anunsuccessfulexploratorywellpromisesa$7.5Mperpetuity.

NPVt=1=$7.5m/.1-$100m=$75m–$100m=-$25m

Probabilityofasuccessfulexploratorywell=.20

Probabilityofanunsuccessfulexploratorywell=.80

Iftheexploratorywellisunsuccessful,thecompanywillnotinvestfurther,sincetheNPVis-$25m.Thusthepresentvalueofcashinflowstobeexpectedis:

PVCIF=（.20x$200m/1.1）+（.8x0）

=$36.36m

PVCOF=$20m（Thecostoftheexploratorywell）

E（NPVt=0）=$36.36m–$20m=$16.36m

Decision:

InvestinexploratorywellsincetheNPVofthisinvestmentopportunityispositive.

Example2:

NewProductDevelopment

-Decisionatt=0isNewProductorConsolidate.

-Decisionatt=1dependsondecisionsatt=0.

-Netcashflowsforallposs