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Valuation of ST Cash Flows

# Valuation of ST Cash Flows - increase sales – What is the...

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Valuation of ST Cash Flows 1 It might seem that valuing intra-year year cash flows is not meaningful. However, financial policy decisions that are permanent are meaningful. ST financial decisions can impact firm value by: Altering operating cash flows (amount).

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Valuation of ST Cash Flows 2 A widely-used valuation method is the Net Present Value (NPV) approach. This approach is preferred since it accounts for the timing and risk of cash flows. There are four steps: Determine the relevant cash flows. Determine the timing of the cash flows. Determine the appropriate discount rate.
Valuation (NPV) Approach 3 Firm XYZ is considering modifying its credit terms from net 30 to net 60 . Relaxing the credit terms and giving customers more time to pay is expected to

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Unformatted text preview: increase sales. – What is the NPV of this decision? • Discounting ST Cash Flows 4 • Other finance classes emphasize the importance of compounding in financial analysis. • While this is meaningful for long-term (LT) decisions, simple interest calculations are adequate for ST decisions. • We will often use a daily interest rate since firms invest in overnight investments or borrow money on credit lines daily. Quick TVM Review 5 • To calculate PV using simple interest , the formula is: – PV = FV / [1 + ( k )( n )] – Where k = annual interest rate and n = # of years • To modify the formula for a daily periodic interest rate: – PV = FV / [1 + ( k )( n /365)] Annual rate times portion of year...
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Valuation of ST Cash Flows - increase sales – What is the...

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