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Why is forecasting future cash flows considered more of an art than a science?

It combines quantitative analysis with judgment, intuition, and experience.

What are mutually exclusive projects in capital budgeting?

Projects that cannot be selected together; choosing one excludes the others.

How does the net present value (NPV) help in ranking mutually exclusive projects?

NPV measures the expected contribution to the firms value, allowing comparison between projects.

What role does strategic assessment play in evaluating investment opportunities?

What is the significance of estimating a risk-appropriate discount rate?

It adjusts the present value of cash flows to reflect the risk level associated with the investment.

How can expected cash flow estimates be categorized as either pessimistic or optimistic?

What is internal rate of return (IRR) and how does it relate to investment valuation?

IRR is the discount rate that makes NPV zero, indicating the investments potential profitability.

What is the distinction between equity cash flows and project cash flows?

What are the steps involved in estimating project free cash flows?

Forecast future cash flows, estimate a discount rate, and discount cash flows to present value.

What are the components that make up free cash flow (FCF)?

Sales, operating expenses, taxes, depreciation, CAPEX, and changes in net working capital.

How does a price decay function inform price forecasting?

It suggests that as market volume increases, prices decrease based on historical patterns.

What is capital expenditure (CAPEX) and why is it important in valuation?

How does the time value of money (TVM) principle impact DCF analysis?

What are some drawbacks of the payback period model?

It ignores the time value of money and future cash flows beyond the payback period.

How do external economic factors impact income-based valuation?

What role does the Weighted Average Cost of Capital (WACC) play in DCF analysis?

WACC is used as the discount rate to adjust for the investments risk when calculating present value.

How can small changes in assumptions impact DCF valuations?

Why is collaboration with complementary product producers significant in project valuation?

What are the factors that influence the assumptions made during cash flow forecasting?

Market conditions, past performance, competition, and economic outlook.

How can changes in working capital affect investment cash flow calculations?

What methodology is generally used for forecasting industry sales estimates?

Historical data analysis combined with forecasting techniques based on past trends.

What are the pros and cons of using an income-based valuation approach?

Explain the concept of discounted payback and its advantages.

Why is it essential to consider terminal value in the valuation of long-term projects?

How do you calculate net operating profit after taxes (NOPAT)?

NOPAT = (Revenues - Total Expenses) × (1 - Tax Rate).

What is the Discounted Cash Flow (DCF) analysis method?

DCF is a method used to value an investment by discounting estimated future cash flows.

Why is attention to detail crucial in defining cash flows for valuations?

Precise cash flow definitions ensure accuracy in forecasting and subsequent analysis.

Why are only incremental cash flows relevant in a DCF analysis?

In what scenarios might an investments growth prospects affect its valuation?

Steady or rapid growth can lead to favorable forecasts, resulting in higher valuations.

How does the DCF process apply to the valuation of a project or investment?

It involves estimating future cash flows, choosing a discount rate, and calculating present value.

What factors influence a firms financial performance that could affect valuation?

Operational efficiency, revenue growth, cost management, and economic conditions.

What cash flows are considered relevant for DCF valuation?

How does salvage value factor into the calculations for project cash flow?

Salvage value is considered when estimating cash flows at the end of a projects life.

Define contribution margin and its importance in project cash flow forecasting.

How can multiple internal rates of return complicate investment decisions?