In the last chapter we laid a foundation for this chapter’s topic: analyzing which business projects we should perform and which we should reject. We needed a lot of concepts to get started: cash flow projections, inflation, risk, the time value of money, and above all, the cost of capital, discounting, and present value. Finally, it’s time to get down to brass tacks and use these concepts to perform discounted cash flow analysis.
There’s some bad news: this chapter features the most difficult mathematics of the course. But there’s also some good news. The math is actually no more difficult than high school algebra...and basic spreadsheet software can do all of the number-crunching for you.
At the end of this chapter, you will solve the Goldenrod Guides Case Study introduced in the previous chapter. Click here to review the setup.
Chapter Goals
After completing this chapter you should be able to:- Perform discounted cash flow analysis and calculate the main measure of a business project’s value: the net present value (NPV)
- Calculate an alternate measure of a business project’s value, called the internal rate of return (IRR)
- Predict the effects of different types of projects on future company financial statements and understand how financial officers make their final go/no-go decisions for business projects