Checklist for calculating NPV - Revision history

Dirkjan at 19:23, 27 August 2020

2020-08-27T19:23:56Z

Dirkjan: Replaced content with "Checklist for calculating NPV Category:finance Category:M12 Category:Model Category:NPV Category:Principles of Corporate Finance"

2020-08-27T18:38:39Z

Replaced content with "Checklist for calculating NPV Category:finance Category:M12 Category:Model Category:NPV Category:Principles of Corporate Finance"

Dirkjan: Created page with "When calculating NPV be aware of the following possible mistakes: # '''Discount cash flows, not profits''': ## Remember that depreciation is not a cash flow ## Concent..."

2020-08-25T07:21:47Z

Created page with "When calculating NPV be aware of the following possible mistakes: # '''Discount cash flows, not profits''': ## Remember that depreciation is not a cash flow ## Concent..."

New page

When calculating [[NPV|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|Working Capital]]'''. As sales increase, the firm may need to make additional investments in [[Working Capital|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|Working Capital]] requirements
## Forget [[Sunk costs|Sunk costs]]
## Include [[Opportunity Cost|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.
[[Category:finance]]

[[Category:M12]]

[[Category:Model]]

[[Category:NPV]]

[[Category:Principles of Corporate Finance]]

← Older revision		Revision as of 18:38, 27 August 2020
Line 1:		Line 1:
−	~~When~~ calculating [[NPV~~\|NPV]] be aware of the following possible mistakes:~~	+	Checklist for calculating NPV
−	~~# '''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\|Working Capital]]'''. As sales increase, the firm may need to make additional investments in [[Working Capital\|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\|Working Capital]] requirements~~
−	~~## Forget [[Sunk costs\|Sunk costs]]~~
−	~~## Include [[Opportunity Cost\|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.~~
	[[Category:finance]]		[[Category:finance]]

← Older revision		Revision as of 19:23, 27 August 2020
Line 1:		Line 1:
−	~~Checklist for~~ calculating NPV	+	When calculating [[NPV\|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\|Working Capital]]'''. As sales increase, the firm may need to make additional investments in [[Working Capital\|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\|Working Capital]] requirements
		+	## Forget [[Sunk costs\|Sunk costs]]
		+	## Include [[Opportunity Cost\|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.
	[[Category:finance]]		[[Category:finance]]