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.
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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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