Terminal cash flow salvage value taxable gains or

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: nd training costs – After-tax gain if replacing old machine 2. Annual free cash flow – Profits, interest, and taxes – Working capital 3. Terminal cash flow – Salvage value – Taxable gains or losses associated with the sale Download free ebooks at bookboon.com 45 Corporate Finance Capital budgeting For long-term projects or stocks (which last forever) a common method to estimate the present value is to forecast the free cash flows until a valuation horizon and predict the value of the project at the horizon. Both cash flows and the horizon values are discounted back to the present using the after-tax WACC as the discount rate: (41) PV FCFt PVt FCF1 FCF2  "  2 t (1  WACC ) (1  WACC ) (1  WACC ) (1  WACC ) t Where FCFi denotes free cash flows in year i, WACC the after-tax weighted average cost of capital and PVt the horizon value at time t. There exist two common methods of how to estimate the horizon value 1. Apply the constant growth discounted cash flow model, which requires a forecas...
View Full Document

This note was uploaded on 10/26/2012 for the course 19 19 taught by Professor - during the Spring '12 term at Sunway University College.

Ask a homework question - tutors are online