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

1、Chapter 5 Discounted Cash Flow Valuation5章现金流量折现法Chapter 12: Cash Flow Estimation and Risk Analysis I. Identifying the Relevant Cash FlowsA. Project cash flow versus accounting income- Cash flow net income or profit: Projects should be judged on their effect on cash flows. Net income considers accou

2、nting conventions and financing which are unrelated to a project. - Net income can be adjusted for these non-cash items to find the cash flow for a firm. (Statement of Cash Flows)B. Rules to Follow:1. Consider only the cash flows that occur as a direct result of accepting the project. - Ignore sunk

3、costs. - Consider the opportunity cost of assets being used. - Include side effects (erosion, cannibalism).2. For replacement projects, focus solely on the changes in cash flows.3. Ignore financing (interest costs); focus on operating cash flows.4. Focus on after tax cash flows!5. Include changes in

4、 net working capital as a cost in any period that it may occur. Addition (reduction) to NWC is a negative (positive) cash flow.C. The 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- A

5、ny changes in net working capital (cash, AR, inventory)- Opportunity costs (alternative use for building, land, etc.)- If its a replacement project, you must consider: * Salvage (sale of old asset) * Tax consequences of sale (book value vs selling price)2. Operating cash flows: Net cash flows during

6、 projects life- All after-tax cash flows from operations- Additional changes in net working capital - If a replacement project: annual adjustment to depreciation3. Terminal year cash flows: Final year adjustments- Cash flows other than from operations- Salvage (sale of new asset at the end of its li

7、fe)- Recovery and reclamation of property (e.g. strip mining)- Recovery of investment in net working capitalD. A Closer Look at Net Working CapitalHow Changes in NWC Affect Cash Flow:An increase in any current asset (+NWC) is a cash outflow (-Cash)A decrease in any current asset (-NWC) is a cash inf

8、low (+Cash)An increase in any current liability (-NWC) is a cash inflow (+Cash)A decrease in any current liability (+NWC) is a cash outflow (-Cash)Cash outflow (- cash) Cash inflow (+ cash)+ Inventory - Inventory+ Accounts Receivable (AR) - AR+ Prepaid expenses - Prepaid expenses+ Buffer cash (cash

9、on hand) - Buffer cash - Wages due +Wages due- Accounts Payable (AP) +AP- Notes Payable (NP) +NP- Deferred income taxes +Deferred income taxes Changes in Net Working Capital (NWC) - May occur in the initial investment year- May occur in subsequent years- All must be reversed in the terminal yearWhy

10、account for Net Working Capital?- Increases in working capital tie up resources- These resources could be invested in other assets- We need to account for the time value of money tied up- We recoup those assets at the end of the projects life II. Project Cash Flow Example: Expansion Project (2002-20

11、06) (See Supplements, Table 12.3 Parts 1-5)1. Initial investment cash flow: - $12,000 Cost of building (2002)- $8,000 Cost of Equipment (2002)- $6,000 Increase in NWC (2002)Total initial investment (2002): $26,0002. Annual cash flows during projects life: Year 1: Year 2: etc.Sales Revenue $60,000 $6

12、1,200Operating Costs Variable 42,000 42,840 Fixed 8,000 8,080 Total 50,000 50,920 Depreciation Building 156 312 Equipment 1,600 2,560 Total 1,756 2,872EBIT 8,244 7,408Taxes(.40) 3,298 2,963Net Income 4,946 4,445Operating Cash Flow 6,702 7,317Investment in NWC (120) (122)Total Net Cash Flow $6,582 $7

13、,1953. Terminal year cash flows (2006):Recapture of NWC: $6,367After-tax salvage value: Building $8,863 Equipment $1,744 Total salvage $10,607 Total terminal year cash flow $16,974Salvage for Building:Selling Price $7,500* Less book value - 10,908 Profit (loss) on sale (3,408) Taxes on profit (loss)

14、 (.40) - (1,363)* After-tax salvage value $8,863 Easy formula for after-tax salvage value: SP - (SP BV)t$7,500 ($7,500 - $10,908).40 = $8,863Salvage for Equipment:Selling Price $2,000* Less book value -1,360 Profit (loss) on sale 640 Taxes on profit (loss) (.40) - 256* After-tax salvage value $1,744

15、 $2,000 (.40)($2,000 - $1,360) = $1,744III. Modified Accelerated Cost Recovery System for DepreciationYearDepreciation rate for recovery period3-year5-year7-year133.33%20.00%14.29%244.4532.0024.49314.8119.2017.4947.4111.5212.49511.528.9365.768.9278.9384.46MACRS Depreciation: Assign asset to appropri

16、ate asset-class (3-year, 5-year, etc) Multiple percentage from table by the depreciable basis Depreciate that amount each year of the assets lifeExample: A 7-year asset with a $50,000 depreciable basisYear1: Depreciate asset by $50,000 x .1429 = $7,145Year2: Depreciate asset by $50,000 x .2449 = $12

17、,245 Straight-line Depreciation: Divide the cost by the number of years over which asset will be depreciated to arrive at annual depreciation Reduce book value each year by the annual depreciationIV. What-If Analysis* Helps identify how much risk exists in NPV forecasts* Scenario analysis looks at b

18、ase case, worst case, and best case* Sensitivity analysis changes a single variable at a timeA. Scenario Analysis: All input variables and their interactionThe three possible outcomes are: Base case: Most likely outcomeWorst case: Pessimistic outcomeBest case: Optimistic outcomeThe three possible va

19、lues for each input variable are: Base case: Most likely outcomeUpper bound: Highest valueLower bound: Lowest valueExample: Water T-Ball ManufacturingEstimates for first years demand, selling price, variable cost and fixed cost are provided below: UPPER BASE LOWERDemand (Q) 500,000 300,000 150,000Pr

20、ice (P) $42.00 33.50 24.00Variable Cost (VC) $18.50 15.00 12.50Fixed Cost (FC) $1MILL 775,000 500,000Profit: 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

21、: Each input variable is examined separatelyThe three possible values for each input variable are: Base case: Most likely outcomeUpper bound: Highest valueLower bound: Lowest valueExample: Water T-Ball Manufacturing UPPER BASE LOWERDemand (Q) 500,000 300,000 150,000Price (P) $42.00 33.50 24.00Variab

22、le Cost (VC) $18.50 15.00 12.50Fixed Cost (FC) $1MILL 775,000 500,000Profit: Q (P-VC) FCBeginning with BASE CASE figures, change one variable at a time to see how sensitive profit is to that particular variableBASE CASE: 300,000(33.50 15) 775,000 = $4,775,000Q Sensitivity:1. 500,000(33.50 15) 775,00

23、0 = $8,475,000 Best case2. 150,000(33.50 15) 775,000 = $2,000,000 Worst caseP Sensitivity:1. 300,000(42.00 15) 775,000 = $7,325,000 Best case2. 300,000(24.00 15) 775,000 = $1,925,000 Worst caseVC Sensitivity:1. 300,000(33.50 12.50) 775,000 = $5,525,000 Best case2. 300,000(33.50 18.50) 775,000 = $3,7

24、25,000 Worst caseC. Decision Trees: - Decision trees are tools for making decisions where a lot of complex information needs to be taken into account. - They provide a structure in which sequential decisions can be laid down and evaluated. - Gathering and evaluating information at different stages c

25、an reduce uncertainty surrounding the investment decision. 1. Drawing a Decision Tree:- Start with a decision that needs to be made. Represent this as the starting point (node) on the tree (the origin).- Working from left to right, draw lines to represent: a. Decisions (test-dont test, invest-dont i

26、nvest)b. Or outcomes of those decisions (information received)- Decisions and outcomes can lead to further decisions. a. Assign costs/benefits to decisions b. Assign probabilities to outcomes c. Work from right to left, combine cost/benefits with probabilities to arrive at an expected value for the

27、decision at the origin.Example 1. Wild Cat Drilling Well: A Two-Period Decision (r=.10) - Decisions: (t=0) Drill an exploratory well; or dont drill. Cost = $20m.(t=1) Invest in further production capacity given the outcome of the exploratory well; or dont invest. Cost = $100m. - Outcomes: (t=1) Succ

28、ess or failure of the exploratory well. (t=2) NPV from investment in production capacity. Evaluating Wild Cat Drilling Well:A successful exploratory well promises a $30M perpetuity from t=1. NPVt=1 = $30m/.1 - $100m = $300m $100m = $200mAn unsuccessful exploratory well promises a $7.5M perpetuity. N

29、PVt=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 expec

30、ted is: PVCIF = (.20 x $200m/1.1) + (.8 x 0) = $36.36m PVCOF = $20m (The cost of the exploratory well) E(NPVt=0) = $36.36m $20m = $16.36m Decision: Invest in exploratory well since the NPV of this investment opportunity is positive. Example 2: New Product Development - Decision at t=0 is New Product or Consolidate.- Decision at t=1 depends on decisions at t=0.- Net cash flows for all poss