This chapter has described how to go about putting together a discounted cash flow analysis
and evaluating the results. In it, we covered:
The identification of relevant project cash flows. We discussed project cash flows
and described how to handle some issues that often come up, including sunk costs,
opportunity costs, financing costs, net working capital, and erosion.
Preparing and using pro forma, or projected, financial statements. We showed how
pro forma financial statement information is useful in coming up with projected cash
flows.
The use of scenario and sensitivity analysis. These tools are widely used to evaluate
the impact of assumptions made about future cash flows and NPV estimates.
Additional issues in capital budgeting. We examined the managerial options implicit
in many capital budgeting situations. We also discussed the capital rationing
problem.
The discounted cash flow analysis we've covered here is a standard tool in the business
world. It is a very powerful tool, so care should be taken in its use. The most important
thing is to get the cash flows identified in a way that makes economic sense. This chapter
gives you a good start on learning to do this.
