Chapter 5 Discounted Cash Flow Valuation：5章现金流量折现法.doc

Chapter 12: Cash Flow Estimation and Risk Analysis I. Identifying the Relevant Cash Flows A. 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 accounting 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 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 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 - Any changes in net working capital (cash, AR, inventory) - Opportunity costs (alternative use for building, land, etc.) - If it’s 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 project’s life - All after-tax cash flows from operations - Additional changes in net working capital - If a replacement project: annual adjustment to depreciation 3. Terminal year cash flows: Final year adjustments - Cash flows other than from operations - Salvage (sale of new asset at the end of its life) - Recovery and reclamation of property (e.g. strip mining) - Recovery of investment in net working capital D. A Closer Look at Net Working Capital How Changes in NWC A