Finance and Accounting Gurus

M

m00ky

I'm in a business policy class and I'm trying to finish up a strategic orientation reconfiguration for radioshack that involves an NPV analysis of cash flows for my new orientation versus the existing orientation.

I have my discount rate and know how to use excel to find my NPV, the only thing I'm not sure of is what numbers to pull from the proforma statement of cash flows in order to find NPV for the orientation. Do I use total projected cash flows from the end of each period (i.e. after tax cash flows) or strictly cash flows resulting from the change in orientation?

Any help is appreciated.
 
you're asking whether to use projected cash flows? i don't think this is not a question someone can objectively answer.
 
start > run > calc

You're good unless your roommate switched it to binary, in which case, just drop the class.
 
gabe said:
you're asking whether to use projected cash flows? i don't think this is not a question someone can objectively answer.
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No, I'm obviously using projections since I'm pulling all of my numbers from proforma statements of cash flows, which are projecting both where the company will be in 5 years according to their current strategic orientation, and where the company will be in 5 years under my suggested new strategic orientation.

I'm almost certain I figured it out though, and decided to only use the change in cash flows, not toal cash flows for each year ended. I think I have just been working on this project too long and didn't realize the obvious answer.
 
Net Present Value (NPV)

sounds to me like you should use the projected cash flows resulting from the 'orientation change' since NPV is a direct measure of the value of the investment

note that i have no finance experience so i definitely would wait for someone who knows wtf they are talking about to provide an answer, but i dont see why you'd use the total cash flow in an NPV calculation.

edit: ok you answer your own question.

out of curiosity, when you use a proforma statement for something like this in your class, do you have to take into account all of their assumptions and accounting practices used to correlate it to some 'standard'? Or do you not have to tweak their cash flow projections?
 
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the problem is way more complicated then that though, you would have to factor out or in various things depending on if it would be a sunk cost or cost not added to change in cash flows
 
wouldnt projected cash flows take into account things like sunk costs, capital investments, bond conversions, dividend and interest payments, etc?

i mean, shouldnt anything where the company spends or makes money be included in that?

i dont really know, i have minimal finance knowledge.
 
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If you are trying to capture the value of added cashflows that results from your plan, you would take the excess on each period that resulted from your change.

I.E., run the NPV analysis on the ORIGINAL scenario, find the NPV of the projected cashflows. Following this, run the NPV calculation on the NEW scenario, and find the NPV of those cash flows.

Subtract the first number from the second to find the additional benefit, in NPV, of implementing the change.
 
I don't know honestly I did these problems all the time in my coporate finance class and sometimes we had to go back and remove "sunk costs" and additional costs, but I could be wrong.

I hate corporate finance and capital budgeting.
 
There are way to many superfluous terms being thrown around here.

If he has proformas that list FREE CASH FLOW, the rest is moot. He's running a NPV analysis on those cashflows, and those cashflows represent the FINAL END RESULT in each year for cashflow. That cashflow would already include the effects of ALL financing, purchasing, income and payment streams with the exception of paid out distributions (and possibly capital expenditures, depending on how the books are kept).

Don't over complicate the problem.
 
KittyCat said:
I don't know honestly I did these problems all the time in my coporate finance class and sometimes we had to go back and remove "sunk costs" and additional costs, but I could be wrong.

I hate corporate finance and capital budgeting.
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He won't have to do this, I assume, unless it was explicitly stated. From the sounds of this, the whole point of the exercise is to work on NPV calcs.
 
Trinket said:
There are way to many superfluous terms being thrown around here.

If he has proformas that list FREE CASH FLOW, the rest is moot. He's running a NPV analysis on those cashflows, and those cashflows represent the FINAL END RESULT in each year for cashflow. That cashflow would already include the effects of ALL financing, purchasing, income and payment streams with the exception of paid out distributions (and possibly capital expenditures, depending on how the books are kept).

Don't over complicate the problem.
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yea, i was just curious if thats what cash flow estimates included.

i was also curious if they have to take into account any questionable accounting practices or assumptions made by the company in their calculations :p

Trinket said:
If you are trying to capture the value of added cashflows that results from your plan, you would take the excess on each period that resulted from your change.

I.E., run the NPV analysis on the ORIGINAL scenario, find the NPV of the projected cashflows. Following this, run the NPV calculation on the NEW scenario, and find the NPV of those cash flows.

Subtract the first number from the second to find the additional benefit, in NPV, of implementing the change.
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if he is looking for the NPV of the 'orientation change', why wouldnt he just using the cashflow difference as a result of the change in a calculation of one NPV yield the same thing?

ie:

NPV1 of the company for the original scenario = (x)/(1+r)^t
NPV2 of the company for new scenario = (x+y)/(1+r)^t where y is the cash flow difference due to the orientation change
NPV2-NPV1 = (x+y)/(1+r)^t- (x)/(1+r)^t = y/(1+r)^t

so NPV benefit of just the change would be (y)/(1+r)^t

mathematically it should yield the same thing, no?
 
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Eggi said:
out of curiosity, when you use a proforma statement for something like this in your class, do you have to take into account all of their assumptions and accounting practices used to correlate it to some 'standard'? Or do you not have to tweak their cash flow projections?
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Yes and no. When a company provides proformas, its generally up the discretion of the analyst to decide if the projections are realistic. If they aren't the analyst can change it through either straight modification of the numbers (with justification and an okay from the Company) or by discounting/cost effecting the numbers later and adding the caveat that "we did this because the projections were unrealistic".
 
Trinket said:
He won't have to do this, I assume, unless it was explicitly stated. From the sounds of this, the whole point of the exercise is to work on NPV calcs.
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You are correct. I opened my finance book to double check.

For anyone that is curious though.

Only count incremental cash flows, intial outlay (startup cost), incremental costs, incremental tax expenses, old equipment resale and tax benefits.

Ignore sunk cost, and interest expenses on financing.

Include opportunity costs, impact on other areas of company, fixed overhead changes.


Eggi accounting is mostly ignored in cash flows. Cash flows are mostly seperate from basic income statement accounting. =)
 
Yeah, there is a big distinction between accounting on an accrual and cash basis, and it's a f'ing pain in the ass
 
Eggi said:
if he is looking for the NPV of the 'orientation change', why wouldnt he just using the cashflow difference as a result of the change in a calculation of one NPV yield the same thing?

ie:

NPV1 of the company for the original scenario = (x)/(1+r)^t
NPV2 of the company for new scenario = (x+y)/(1+r)^t where y is the cash flow difference due to the orientation change
NPV2-NPV1 = (x+y)/(1+r)^t- (x)/(1+r)^t = y/(1+r)^t

so NPV benefit of just the change would be (y)/(1+r)^t

mathematically it should yield the same thing, no?
Click to expand...

By the way, I believe we're saying the same thing different ways. What you're describing is what I'm describing. Simply take the difference between the initial cash flows and the cash flows w/ the change, and you have your answer.
 
Eggi remember the statement of cash flows in official accounting didn't even exist till the mid 80's.

Cash flows and tax accounting are to separate things. A company could be reporting a profit but have negative cash flows. A lot of people get hung up trying to apply accounting rules to cash flows, but they can't separate that they are two different concepts.
 
The more common scenario is negative net income on the books and positive actual cash flow.

I can't tell you how many clients we have that are way in the red on their books but making bank. They aren't screwing the system or anything, it's just the way it works.
 
This is honestly the most boring part of Corporate finance. I know a lot of finance friends that were turned off after the first year of having to do all these NPV calculations.

I absolutely hated this area of finance when I first started. Maybe I am more of an investments person.
 
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