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1、The McGraw-Hill Companies, Inc.,20017- 1Irwin/McGraw-HillIrwin/McGraw-HillChapter 7Fundamentals of Corporate FinanceThird EditionUsing Discounted Cash Flow Analysis to Make Investment DecisionsBrealey Myers Marcusslides by Matthew WillIrwin/McGraw-HillThe McGraw-Hill Companies, Inc.,2001The McGraw-H
2、ill Companies, Inc.,20017- 2Irwin/McGraw-HillTopics CoveredDiscounted Cash Flows, NetProfitsIncremental Cash FlowsTreatment of InflationSeparation of Investment & Financing DecisionsExample: Blooper IndustriesThe McGraw-Hill Companies, Inc.,20017- 3Irwin/McGraw-HillCash Flow vs. Accounting IncomeDis
3、count actual cash flowsUsing accounting income, rather than cash flow, could lead to erroneous decisions.ExampleA project costs $2,000 and is expected to last 2 years, producing cash income of $1,500 and $500 respectively. The cost of the project can be depreciated at $1,000 per year. Given a 10% re
4、quired return, compare the NPV using cash flow to the NPV using accounting income.The McGraw-Hill Companies, Inc.,20017- 4Irwin/McGraw-HillCash Flow vs. Accounting IncomeThe McGraw-Hill Companies, Inc.,20017- 5Irwin/McGraw-HillCash Flow vs. Accounting IncomeThe McGraw-Hill Companies, Inc.,20017- 6Ir
5、win/McGraw-HillIncremental Cash FlowsDiscount incremental cash flowsInclude All Indirect EffectsForget Sunk CostsInclude Opportunity CostsRecognize the Investment in Working CapitalBeware of Allocated Overhead CostsIncremental Cash Flowcash flow with projectcash flow without project=-The McGraw-Hill
6、 Companies, Inc.,20017- 7Irwin/McGraw-HillIncremental Cash FlowsIMPORTANTAsk yourself this question Would the cash flow still exist if the project does not exist?If yes, do not include it in your analysis.If no, include it.The McGraw-Hill Companies, Inc.,20017- 8Irwin/McGraw-HillInflationINFLATION R
7、ULEBe consistent in how you handle inflation!Use nominal interest rates to discount nominal cash flows.Use real interest rates to discount real cash flows.You will get the same results, whether you use nominal or real figuresThe McGraw-Hill Companies, Inc.,20017- 9Irwin/McGraw-HillInflationExampleYo
8、u own a lease that will cost you $8,000 next year, increasing at 3% a year (the forecasted inflation rate) for 3 additional years (4 years total). If discount rates are 10% what is the present value cost of the lease?The McGraw-Hill Companies, Inc.,20017- 10Irwin/McGraw-HillInflationExample - nomina
9、l figuresThe McGraw-Hill Companies, Inc.,20017- 11Irwin/McGraw-HillInflationExample - real figuresThe McGraw-Hill Companies, Inc.,20017- 12Irwin/McGraw-HillSeparation of Investment & Financing DecisionsWhen valuing a project, ignore how the project is financed.Following the logic from incremental an
10、alysis ask yourself the following question: Is the project existence dependent on the financing? If no, you must separate financing and investment decisions.The McGraw-Hill Companies, Inc.,20017- 13Irwin/McGraw-HillBlooper Industries(,000s)The McGraw-Hill Companies, Inc.,20017- 14Irwin/McGraw-HillBlooper IndustriesCash Flow From Operations (,000s)or $3,950,000The McGraw-Hill Companies, Inc.,20017- 15Irwin/McGraw-HillBlooper IndustriesNet Cash Flow (entire project) (,000s)NPV 12% = $3,564,000
