1) When deciding whether to go forward with a capital investment, why can’t we just compare the investment requirement against the sum of the positive cash flows?
2) While DCF Analysis is the boilerplate for investment decision making, what’s the limitation of the system?
3) Explain how a DCF could still be negative if all of the post-investment cash flows are positive.
4) Explain the process of computing a Discounted Cash Flow (DCF) on Excel.
5) What are the various ways in which firms may decide to set their Discount Rate?
6) How would a DCF change if an analyst increased (or decreased) the Discount Rate?
7) When considering foreign investments, firm’s often upwardly adjust the Discount Rate to reflect increased project risk. How does this affect the investment decision?
8) Intuitively, we know that investments sited in some regions of the world are riskier than the same investment sited in the US. What’s a common technique for adjusting a DCF to reflect regional risk?
9) What is an Internal Rate of Return (IRR)?
10) Explain the process of computing an IRR on Excel.
11) What is a common way in which firms use an IRR in their decision making?
12) How are DCF and IRR used in conjunction with one another?
13) What’s a Hurdle Rate, and how might this differ from a firm’s Discount Rate?
14) Within the context of a DCF study, the term Cash Flow takes on a meaning slightly different than its normal meaning of Cash Flow = Net Income + Depreciation. When computing DCF’s, Cash Flow = Net Income + Depreciation + Interest Expense. Why must we add Interest Expense?
15) A woman is considering purchasing a small business for $250,000 by way of a 10.0% loan from the Small Business Association. If the business continues to generate annual cash flows of $30,000 would this be a sound investment (i.e. What is the DCF and IRR)?
16) In the problem above (#15), how would a 2.6% interest rate affect the decision?
17) A start-up firm is seeking $450,000 in financing which they believe can be obtained at 12.5% interest rate. Their pro forma financials show their cash flow projections as shown below. After the potential lenders review the start-up’s financials, how likely is it that they will obtain the financing (i.e. What’s the DCF & IRR)? What if they could scratch out positive cash flows of $25,000 in y2 and y3?
y1… $0 (i.e. break even on cash flow)