When calculating [[NPV]] be aware of the following possible mistakes:
# ''Discount cash flows, not profits'':
## Remember that depreciation is not a cash flow
## Concentrate on cash flows //''after''// taxes. Stay alert for differences between tax depreciation and depreciation used in reports to stakeholders.
## Exclude dept interest or the cost of repaying a loan from the project cash flows. This enables you to separate the investment fro the finance decision.
## ''Remember the investment in [[Working Capital]]''. As sales increase, the firm may need to make additional investments in [[Working Capital]]. As the project comes to an end, it will recover those investments.
## Beware of allocated overhead charges (heat, light, etc). these may not reflect the incremental cost of the project.
# ''Estimate the projects //incremental// cash flows'' - that is, the difference between the cash flows with the project and those without the project.
## Include all indirect effects of the project, such as the impact on the sales of the firm's other projects.
## Do not forget [[Working Capital]] requirements
## Forget [[Sunk costs]]
## Include [[Opportunity Cost]]s, such as the value of land that you would otherwise sell.
# ''Treat inflation consistently''
## If cash flows are foretasted in nominal terms, use a nominal discount rate
## Discount real cash flows at a real rate.
bag
finance_public
created
Sat, 04 Jun 2011 13:26:56 GMT
creator
dirkjan
modified
Sat, 04 Jun 2011 13:26:56 GMT
modifier
dirkjan
tags
M12
Model
NPV
Principles of Corporate Finance
creator
dirkjan