HELP!! CF for Payback period, NPV, IRR and VALUATION!!!! different, knowledge, studying, actually, increase

orang3eph

I actually have passed level 3 already but when I start to apply the knowledge I learn before, I found that studying and applying is two different thing and I really need some help
Let’s say my company buy a company for 1000 and that company have net income 100, depreciation 10, capex 30 and increase in working capital 20 for every year and now i want to calculate the payback period
someone tell me the CF is NI+Depre= 110 and somone say it should include the capex and change in working capital, that is CF = NI+Depre-CAPEX-Increase in WC, I have seem both calculation and I am not sure which one is correct.
And is the CF for payback period also same as the CF for NPV and IRR????

jmh530

The 2nd one is the correct FCF available for debt and equity. You must also add any other non-cash charges.

kingstongal

bumblebee1182 is correct. You have to look at the cash flow after all non-cash charges have been removed and you have accounted for investment required to sustain the business. I’ve worked in fixed income research, investment banking, project finance and now risk management and that is the FCF calculation used.

Darien

really thank you all for helping
so is that I should use the free cash flow to firm, which is
EBIT x (1-Tax rate) + depreciation - Capex +/- change in working capital
to calculate the NPV, IRR and also payback period? Does that mean that the CF for NPV, IRR and Payback is also the same as the CF for valuation??
I actually have another question about valuation, my company want to acquire an overseas company X, so shall I first do a valuation on company X and use that amount as initial investment and then do a NPV to see if the project is feasible? is this approach correct ? and is that I should use a discount rate related to company X for valuation and use another discount rate related to my own comapny to calculate the NPV?

jmh530

That makes sense. Don’t forget the control premium on the valuation of X.
For the discount rate of your company, do include pension assets and liabs (if applicable) in the marginal WACC calculation. (I’m glad that I remember something from L3 curriculum after the exam  )

Carson

thank you very much again
Well I have several more questions, if I want to value a company in cambodia in which it use US dollar in daily operation (Cambodia has its local currency but most business there use US dollar), can I use the US risk free rate in calculating the WACC because that company receive and pay US dollar??
And I heard that there is a Private Company Premium and Small Company Premium that I should add in the WACC and there is also a discount for lack of marketability (DLOM) after I calculate the equity value when I am doing the valuation, if I did add all these premium to the WACC and apply this DLOM at the end, will I will double counting the effect ?
Actually is there a guide that tell in what situation I should apply these premium or discount or I just apply whenever I see fit (wild guess in practice)?

HuskyGrad2010

You should look at similar acquisitions - I am sure there are studies that will give you an average of the premiums and discounts. We had a case study in corporate finance that listed these values in the US over several years.
I don’t believe you would be double counting because the formula goes like this : value* (1+CP)*(1-DLOM) and these two are completely different concepts that need to be considered.
About the risk free rate, I think you could take US risk-free rate but then add the country premium. The currency shouldn’t be the only factor to determine risk. Sovereign risk must be considered. The risk geographic location of this company’s market, operations etc should be added back. Again, I haven’t worked in this field so I’d be curious as to what others say.

meghanjackson

Shouldn’t he use the discount rate of the firm doing the acquisition since they are the ones putting up the capital?

luda002

Definitely. I believe he was asking about whether he could start with US RF rate for the company before adding the equity premium.

strikethree

Sorry, maybe I misunderstood. I was addressing this earlier question:
“and is that I should use a discount rate related to company X for valuation and use another discount rate related to my own comapny to calculate the NPV?”
Anyway, you’ve pointed him on the right track.