Topic 5 Valuation and FCF

Question 1

Problematic situations with NPV

Answer 1

Capital Rationing - not enough cash to fund all positive NPV projects
-> Pick the highest NPV projects available or source more capital
Decisions taken throughout the lifetime of the project - The Project’s forecasted cash flows can change during the lifetime of the project
-> better off using the real options method to represent uncertainty

Question 2

Excess Cash on FCF

Answer 2

Excess cash works as a negative leverage, however cash held for day-to-day operations does not

Question 3

Short-term Debt on FCf

Answer 3

not included bc not on operations so current liabilities are just accounts payable

Question 4

Opportunity costs in capital budgeting

Answer 4

If the project uses a resource from the firm it must allocate that to the project as a cost and increase the S&A of the project

Question 5

Cannibalization

Answer 5

The project decreases sales of another firm’s product one must allocate the losses to the new product -> sales decreases and equivalent COGS