Session 13: Time-weighting cash flows and dealing with uncertainty

In this class, we started the move from cash flows to incremental cash flows by asking two questions: (1) What will happen if you take the project and (2) What will happen if you do not? If the answer is the same to both questions, the item is not incremental. That is why "sunk" costs, i.e., money already spent, should not affect investment decision making. It is also the reason that we add back the portion of allocated G&A that is fixed and thus has nothing to do with this project. Finally, we looked at two time-weighted, incremental cash flow approaches to calculating returns, NPV and IRR, and used them to analyze the Rio Disney theme part. In the second half of the class, I talked about why currency choices should not affect investment decisions (but sometimes do) as well as ways of dealing with uncertainty, ranging from payback to simulations. If, like me, you find yourself fascinated by simulations, but your statistics is a little rusty, you can try this paper I have on statistical distributions.
You don’t have to read the whole paper, just the appendix.

[QQQQQman]

In the questions, where do you get to terminal value?

q2. answer 38.9m.

Now 1 2 3 4 5
Investment -$50.00
ATCF $4.00 $4.40 $4.84 $5.32 $5.86
(so far so good, then this)

Terminal value $99.56


PV @8% -$50.00 $3.70 $3.77 $3.84 $3.91 $71.75
NPV $36.74

No indication at all is explained in the question as to how the Terminal value of £99.56 is arrived at.