|
|
| 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]] |
| | | | |
