Cashflow Estimation

2/27/2013
Nattawoot Koowattanatianchai
Lecture 7

(Cash Flow Estimation, Risk Analysis, and

Real Options)
2/27/2013
2/27/2013
(depreciation)
2/27/2013
(current expenditures)
(wages)
(capital expenditure)

Implication:
(noncash expense)
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(sale)
(revenue)
(cost of goods
sold)
()
$100 1
2 150
3
2/27/2013
2 = $150 - $100 = $50

2 = 0

item/year
Sales
- Change in A/C
receivables
- Cost of goods sold
- Change in
inventories
= Net cash flow
2/27/2013
1
0
0
2
150
150
3
0
-150
0
100
100
-100
0
0
-100
+150
NPV

2/27/2013
$2000
2
$1500 $500

$1000 10%
NPV
Year 1:
Year 2
Cash income = $1500

Depreciation = $1000
A/C income = +$500
Cash income = $500
Depreciation = -$1000
A/C income = -$500
NPV = 500/1.1 + (-500)/1.12 = $41.32
2/27/2013
NPV
Year 0:
Cash income = $0
Project cost = -$2000
Cash flow = -$2000
Year 1
2/27/2013
Cash income = $1500

Project cost = $0
Cash flow = +$1500
10
NPV
Year 2
Cash income = $500

Project cost = $0
Cash flow = +$500
NPV = -2000 + 1500/1.1 + 500/1.12 = -$223.14
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11
()
A
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12
(incremental cash flows)
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13
(sunk costs)
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14
(opportunity costs)
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NPV > 0

NPV
(
)
15
(side effects)
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(erosion)
(synergy)

16
(taxes)
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17
(taxes)
(tax shield)
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3
$5000 $45000
5 = 40%

$1600
$3600 4 5
18
(interest expenses)
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(
)
(
)
19
(net capital spending)
Operating Cash Flows = EBIT Taxes +

Depreciation
(salvage value)
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20
A
15 5
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= $1,125,000
= 10
= $400,000
= 35%
21
= $1,750,000
=
$56,000
= 10
= $500,000
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22
2/27/2013
40,000
28,000
$15,000

$150,000
$285,000
$100,000
23
= $1,750,000
+ $56,000 = $1,806,000
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24
= $400,000 (-$56,875) = $456,875
2/27/2013
>
<
= = $400,000
= =
$1,125,000 $1,125,000/10 5 = $562,500
= .35 ($400,000 $562,500) = -$56,875
25
2/27/2013
= (1
) = $150,000 (1 - .35) = $97,500
26
(operating
expenditure)
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=
(1 )
27
=
$40,000 (-$28,000) = $68,000
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NWC
28
= $15,000
2/27/2013
= -$1,806,000 + $456,785 - $97,500 - $68,000 = $1,514,625
29
1 (n-1)
2/27/2013
Operating Cash Flows =

EBIT Taxes + Depreciation
EBIT
30
1 (n-1)
1 5 (
5
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= $1,806,000/10 $1,125,000/10 = $68,100

OCF 1 5 = ($285,000 +
$100,000 - $68,100)(1 0.35) + $68,100 =
$274,085
31
1 (n-1)
6 9 (
)
2/27/2013
= $1,806,000/10 =
$180,600
OCF 6 9 = ($285,000 +
$100,000 - $180,600)(1 0.35) + $180,600 =
$313,460
32
=
($285,000 + $100,000 - $180,600) (1
0.35) + $180,600 = $313,460
= $68,000
2/27/2013
33
= $500,000 $175,000 = $325,000
= $1,806,000 - $1,806,000/1010
=0
= = $500,000
= ($500,000 0) 0.35 = $175,000
10 = $313,460
+ $68,000 + $325,000 = $706,460
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34
(the
Fisher equation)
(1 + Nominal Rate) =
(1 + Real Rate) x (1 +
Inflation Rate)
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Real rate = (1+ Nominal

Rate)/(1 + Inflation
Rate)-1
Real rate Nominal
Rate Inflation Rate
35
: (nominal cash
flow) > (real cash flow)
4
= $10
= 6%
2%
100,000
4
= 100,000 x 10 x 1.084 = $1,360,000
4 =
$1,360,000/1.064 = $1,080,000
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36
(nominal cost of
capital) > (real cost of
capital)
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NPV
NPV
37
NPV
(sensitivity
analysis) (scenario
analysis)
(breakeven analysis)
NPV
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38
Sensitivity Analysis
NPV
( IRR)
NPV

NPV
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39
2/27/2013
40
2/27/2013
NPV

NPV
41
1
$1
60%

$1.6
4
2/27/2013
42
NPV
Investment
Year 1
Years 2-5
Revenues
$7,000
Variable Costs
(3,000)
Fixed Costs
(1,800)
Depreciation
(400)
Pretax profit
$1,800
Tax (34%)
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NPV 1 $1,600
(612) NPV 1 $3,433.75
Net Profit
Cash Flow
10%
t 1
$1,588
(1.10)t
$1,188
-$1,600
$1,588
43
NPV
Investment
Revenues
Variable
Costs
Fixed Costs
Depreciation
Pretax profit
Tax (34%)
Net Profit
Cash Flow
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Year 1
-$1,600
Years 2-5
$4,050
(1,735)
(1,800)
(400)
$115
(39.10)
$75.90
$475.90
10%
4
$475.90
NPV 1 $1,600
t
t 1 (1.10)
NPV 1 $91.461
44
Invest
NPV = $3.4 b
Success
Test
Do not
invest
NPV = $0
Failure
Do not NPV $0
test
2/27/2013
Invest
NPV = $91.46 m
45
?
Payoff
Payoff
Prob.
Prob.

payoff
sucess given success failure given failure
Expected
Expected
payoff
.60 $3,433.75 .40 $0 $2,060.25
NPV $1,000
2/27/2013
$2,060.25
$872.95
1.10
46
$6,000 $7,000
%Rev
14.29%
$7,000
$1,341.64 $3,433.75
%NPV
60.93%
$3,433.75
60.93%
4.26
14.29%
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47
Scenario Analysis

NPV
2/27/2013

NPV
NPV
NPV
NPV > 0
48
Break-even analysis
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49
Break-even analysis
2/27/2013
Accounting break-even:
= 0
Cash break-even:
= 0
Financial break-even: NPV
=0
50
(real options)
NPV

M = NPV + OPT
=
+
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51
ABC
(
100 )
$12
$2
20%
2/27/2013
NPV = -$12 + $2/0.2 = -$2
52
( = $3 )
( = $1
)
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Optimistic NPV = -$12 + $3/0.2 = $3

Pessimistic NPV = -$12 + $1/0.2 = -$7
NPV = 0.5 x $3 + 0.5 x (-$7) = -$2
53

10
NPV = 0.5 x 10 x $3 + 0.5 x (-$7) = $11.5
M = NPV + OPT
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$11.5 = -$2 + OPT

OPT = $13.5
54
( = $6 )
( = -$2 )
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Optimistic NPV = -$12 + $6/0.2 = $18

Pessimistic NPV = -$12 + $1/0.2 = -$22
NPV = 0.5 x $18 + 0.5 x (-$22) = -$2
55
NPV = 0.5 x $18 + 0.5 x (-$12 - $2/1.2) = $2.17
M = NPV + OPT
2/27/2013
$2.17 = -$2 + OPT

OPT = $4.17
56
XYZ
@ time 0: $300
= $250 @ time 1
@ time 1 = $575
@ time 1 = $0
r = 10%
: ?
2/27/2013
57
NPV
Payoff
Payoff
Prob.
Prob.

payoff
Expected
Expected
payoff
0.5 $575 0.5 0 $287.5
NPV $300
2/27/2013
$287.50
$38.64
t
(1.10)
58
Success: PV =
$575
Drill
$300
Sit on rig; stare

at empty hole:
PV = $0.
Failure
Do
not
drill
2/27/2013
NPV $0
Sell the rig;

salvage
value = $250
59
Expected
payoff
Payoff
Payoff
Prob.
Prob.

Expected
payoff
0.5 $575 0.5 250 $412.50
$412.50
NPV $300
$75.00
t
(1.10)
2/27/2013
60

M = NPV + OPT
$75.00 = $38.64 + OPT
OPT = $113.64
2/27/2013
61

Year
0
1
2
3
4
Cost
$ 20,000
$ 18,000
$ 17,100
$ 16,929
$ 16,760
PV
$ 25,000
$ 25,000
$ 25,000
$ 25,000
$ 25,000
NPV t
$ 5,000
$ 7,000
$ 7,900
$ 8,071
$ 8,240
NPV 0
$ 5,000
$ 6,364
$ 6,529
$ 6,064
$ 5,628
$7,900
$6,529
(1.10) 2
4
2/27/2013
62
4/6/2011
2/27/2013
Natt Koowattanatianchai
63
63
Email:
Homepage:
087- 5393525
Office:
2/27/2013
02-9428777 Ext. 1221
Mobile:
http://fin.bus.ku.ac.th/nattawoot.htm
Phone:
fbusnwk@ku.ac.th
9 .

64

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2/27/2013

(Cash Flow Estimation, Risk Analysis, and

2 = $150 - $100 = $50

Cash income = $1500

NPV = 500/1.1 + (-500)/1.12 = $41.32

Cash income = $1500

Cash income = $500

NPV = -2000 + 1500/1.1 + 500/1.12 = -$223.14

(incremental cash flows)

(net capital spending)

Operating Cash Flows = EBIT Taxes +

= $400,000 (-$56,875) = $456,875

= -$1,806,000 + $456,785 - $97,500 - $68,000 = $1,514,625

Operating Cash Flows =

= $1,806,000/10 $1,125,000/10 = $68,100

= $500,000 $175,000 = $325,000

Real rate = (1+ Nominal

(612) NPV 1 $3,433.75

.60 $3,433.75 .40 $0 $2,060.25

NPV = -$12 + $2/0.2 = -$2

Optimistic NPV = -$12 + $3/0.2 = $3

NPV = 0.5 x 10 x $3 + 0.5 x (-$7) = $11.5

$11.5 = -$2 + OPT

Optimistic NPV = -$12 + $6/0.2 = $18

NPV = 0.5 x $18 + 0.5 x (-$12 - $2/1.2) = $2.17

$2.17 = -$2 + OPT

0.5 $575 0.5 0 $287.5

Sit on rig; stare

Sell the rig;

sucess given success failure given failure

0.5 $575 0.5 250 $412.50

02-9428777 Ext. 1221

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