3774705
Description
Flashcards by sarah.novis, updated more than 1 year ago
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Created by sarah.novis
about 9 years ago
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| Question | Answer |
| Discounted cash | Judge the present value, at some discount rate, of the cash flows from our project |
| Capital | Occurs at the front end of the project and is not discounted much |
| Dept | Need agreement with the banks as to how much debt we can have Need to borrow more money to interest during construction - add to the capital |
| Future P&L | Not book profit, it is our discounted cash generation |
| Working capital | Need to pay suppliers before we get our revenue. Must account for in discounted cash flow but we get it back in the end |
| Simple first pass | Always start with simple analysis. Assume fully funded by equity - no interest but depreciation |
| Real analysis for the board | Look at how we will manage debt and impact of interest. The discount factor we want apply to account for the time value of money is the rate we want to earn the equity |
| More real analysis for the board | Must pay interest before can pay dividends or keep as cash. Dept cost less and it is more secure. Our required return on the equity is higher as the equity owners are carrying the market risk on the revenue for our project |
| WACC | Weighted average cost of capital |
| WACC equation | WACC = E/(E+D) x return on E + D/(D+E) x (1-tax rate) x cost on D |
| Discount rate | =1/(1+discount rate)^T |
| Capital charges | Occur early and are not discounted much Cash generation comes later and is more heavily discounted |
| Which discount rate to use? | Risky industries (such as fashion) use higher discount rates than say water |
| Incremental impact | Need to know the difference between the cash generation of the company with or without the project |
| Yes or no to project? | Depends not just on future discounted cash generation but also on sustainability - economic, social and environmental Also on the market |
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