对“全投资现金流量表”的修改意见

《建设项目经济评价方法与参数》已使用8年多,其对全投资现金流量表和内部收益率和净现值的现定存在一定问题,建议将全投资现金流量表改称项目现金流量表,并在现金汉出项中增加一项利息支出等。     

A Companion For NPV: The Generalized Relative Rate of Return

We show how to determine a unique rate, for a particular cash flow stream, that is used only whenever a project demands outside resources to compound the rates of the existing term structure precisely at those times. The net present value of the cash flow stream when discounted with the thus-modified term structure becomes zero. We therefore determine a vector of rates that belongs to the induced space of internal rates of return for that cash flow stream. The rate is applicable under discrete stochastic interest rate representations and provides maximum loan rates that may be contracted only when needed thus keeping a project financially autonomous. (Any investments required may be fully repaid by the project's own cash outflows).     

A NEW APPROACH TO DEPRECIATION MEASUREMENT FOR PUBLIC UTILITIES: COMMENT

This paper examines the use of a simple heuristic for evaluating projects. We posit that ranking projects by IRR and rejecting marginal projects can be superior to a NPV rule if 1) project managers have incentives to overstate cash flow forecasts that occur late in a project's life, 2) project rankings determine project acceptance because not all positive NPV project's are accepted, and 3) a project's IRR is greater than the WACC. In these instances, the IRR heuristic undervalues distant cash flows and thus, reduces project managers' incentives to positively bias forecasts.     

Valuation of projects with minimum revenue guarantees: A Gaussian copula–based simulation approach

This technical note presents a numerical simulation technique to perform valuations of infrastructure projects with minimum revenue guarantees (MRG). It is assumed that the project cash flows—in the absence of the MRG—can be described in a probabilistic fashion by means of a very general multivariate distribution function. Then, the Gaussian copula (a numerical algorithm to generate vectors according to a prespecified probabilistic characterization) is used in combination with the MRG condition to generate a set of plausible cash flow vectors. These vectors form the basis of a Monte Carlo simulation that offers two important advantages: it is easy to implement and it makes no restrictive assumptions regarding the evolution of the cash flows over time. Thus, one can estimate the distribution of a broad set of metrics (net present value, internal rate of return, payback periods, etc.). Additionally, the method does not have any of the typical limitations of real options–based approaches, namely, cash flows that follow a Brownian motion or some specific diffusion process or whose volatility needs to be constant. The usefulness of the proposed approach is demonstrated with a simple example.     

2006 IIE-EED Business Meeting Minutes

The duration measure of weighted average life has been applied in the capital budgeting literature as a measure of project liquidity. Duration is superior to payback methods because it considers both the timing and present value of the entire cash flow stream. However, the literature is ambivalent on the choice of discount rate in calculating project duration. For duration to properly serve as a project liquidity measure, the internal rate of return should be used to discount future cash flows. Examples show that using the firm's cost of capital to calculate duration fails to measure the time to recover initial project outlays in present value dollars.     

篱笆圈在海外油气项目投资评价中的应用

在国际油气勘探开发合同中,一个国家内各独立项目的财税条款通过税收篱笆圈(Ring Fence)在某一层次上相互影响。在进行海外油气项目投资组合评价时,应根据合同中规定的财税条款所确定的篱笆圈层次关系,确定应税收入的计算层次和顺序,确保项目税后净现金流和净现值数据真实反映合同财税条款。忽略合同中规定的财税条款对篱笆圈的规定,有时会导致评价结果失真,很可能导致投资决策失误。因此,在进行海外油气项目投资组合经济评价时,应严格按照合同中规定的计算层次和步骤建立评价模型,提高经济评价的准确性,更好地为投资决策服务。     

A review of: “PROJECT MANAGEMENT IN MANUFACTURING AND HIGH TECHNOLOGY OPERATIONS” by Adedeji B. Badiru,John Wiley and Sons,Inc., New York, 1988, xxii + 319 pp., ISBN 0471-62892-1, List $44.95.

The conventional approach to considering working capital cash flows in capital budgeting is to omit them or include some ad hoc figures at the initiation and termination of the project. The authors argue for an endogenous system of estimating relevant working capital cash flows on a periodic basis. Otherwise, the present value of working capital cash flows is biased against the project's acceptance. Examples of calculating working capital cash flows as related to changes in annual sales are presented for three time patterns of sales and contrasted to the conventional method. An empirical study of the linear relationship of net working capital and sales revenue of 770 companies is reported, and an alternative cash flow model is offered thai includes working capilal cash flows.     

FREE CASH FLOW (FCF), ECONOMIC VALUE ADDED (EVA™), AND NET PRESENT VALUE (NPV):. A RECONCILIATION OF VARIATIONS OF DISCOUNTED-CASH-FLOW (DCF) VALUATION

The paper assists the user of DCF methods by clearly setting forth the relationship of free-cash-flow (FCF) and economic value added (EVA?) concepts to each other and to the more traditional applications of DCF thinking. We follow others in demonstrating the equivalence between EVA and NPV, but our approach is more general in that it links the problems of security valuation, enterprise valuation, and investment project selection. Additionally, our approach relates more directly to use of standard financial accounting information. Beginning with cash budget identity, we show that the discounting of appropriately defined cash flows under the free-cash-flow valuation approach (FCF) is mathematically equivalent to the discounting of appropriately defined economic profits under the EVA? approach. The concept of net operating profit after-tax (NOPAT), found by adding after-tax interest payments to net profit after taxes, is central to both approaches, but there the computational similarities end. The FCF approach focuses on the periodic total cash flows obtained by deducting total net investment and adding net debt issuance to net operating cash flow, whereas the EVA? approach requires defining the periodic total investment in the firm. In a project valuation context, both FCF and EVA? are conceptually equivalent to NPV. Each approach necessitates a myriad of adjustments to the accounting information available for most corporations.     

Letter From the Editor

This paper Identifies situations in which the widely recommended procedures for evaluating mutually exclusive projects with unequal lives may result in incorrect project rankings. These situations arise from the failure of conventional techniques to place alternatives on an appropriate equivalent-risk basis and may occur whether a net present value or equivalent annual annuity approach is utilized. We develop alternative discounted cash flow procedures which correctly reflect the nature of risk. In so doing, we address the following important issues: 1) the choice of the discount rate to be used in calculating the net present value of a series of replications of a project: 2) the choice of a discount rate for calculating the equivalent annual annuity for a series of replications: and 3) the selection of an appropriate common-life horizon for comparison of alternative projects.     

Probability Distribution of the Project Payback Period Using the Equivalent Cash Flow Decomposition

For stochastic cash flows, probabilistic approaches to determine a complete distribution of payback period are very limited. The payback analysis based on the net present value (NPV) has several advantages. For annual cash flows, however, the NPV-based method does not provide a complete payback distribution. This article proposes a new technique, the equivalent cash flow decomposition (ECFD), which converts an annual cash flow into an equivalent subannual cash flow at a desired level of precision. The ECFD technique can be used in conjunction with any probabilistic cash flow technique. This article demonstrates that the ECFD technique overcomes the discontinuity limitation of the conventional NPV-based payback period method and generates a complete distribution of the payback period of annual cash flows. Examples indicate that the proposed method is robust with the accuracy comparable to Monte Carlo simulation.     

A review of: “ENGINEERING ECONOMICS” by James L. Riggs,McGraw-Hill Book Company: New York, 1977, 609 pages, $19.50 list.

The relevance of corporate investment decisions lies in their impact on shareholder wealth. It not only depends on the investment project but also on the corporate dynamics that turns it into the sequence of shareholders’ capital contributions, dividends, and gross terminal value that constitutes the shareholders’ investment project (SIP). We develop a model to calculate the SIP cash flows and the values of its interim capitals following the average internal rate of return (AIRR) paradigm. The shareholders’ final value depends on two reinvestment rates that, respectively, capture the returns obtained by the retained cash flows and the dividends reinvested by shareholders. On this basis, we approach the analysis of value creation combining both reinvestment rates in the shareholders’ net present value (SNPV). This model enables us to obtain the AIRR of the SIP and a variant of it, the equity growth rate that embeds the impact of internal and external reinvestment on the shareholders’ final value.     

Project valuation in the pharmaceutical industry: a comparison of least‐squares Monte Carlo real option valuation and conventional approaches

Least‐squares Monte Carlo simulation (LSM) is a promising new technique for valuing real options that has received little or no attention in the pharmaceutical industry. This study demonstrates that LSM can handle complex valuation situations with multiple uncertainties and compounded American‐type options. The limited application of real option valuation (ROV) in the pharmaceutical industry is remarkable, given the importance of accurate project valuation in an industry that requires large investments in high‐risk projects with long pay‐back periods, which is furthermore suffering from ever‐increasing development costs and shrinking profit margins. The LSM model developed in this study is constructed as an extension of a discounted cash flow model that should be familiar to economists active in the pharmaceutical industry. A number of pharmaceutical projects have been evaluated using LSM ROV, binominal real option valuation and expected net present value techniques. The different results yielded by these methods are explained in terms of differences in risking assumptions and ability to capture the value of flexibility. The analysis provides a framework to introduce the basic concepts of real option pricing to a non‐specialist audience. The LSM model illustrates the potential for real‐life commercial assessment as the versatility of the technique allows for an easy customisation to specific business problems.     

Investment Project Valuation: A New Equity Perspective

We suggest a new approach to calculating a project's net present value, termed the displaced equity method. Based on a straightforward formula, it analyzes a project partially financed with debt from the perspective that every year the amount of outstanding debt displaces an equivalent amount of equity that otherwise would be tied up in the project. Although they represent distinct shareholders' perspectives, the displaced equity method and the equity residual method yield identical net present values and internal rates of return. Every year, the project's value calculated with the displaced equity method is equal to the sum of the project's debt and equity values. In practice, when the schedule of expected outstanding debt amounts is known, using the displaced equity method is an easy way to estimate the project's net present value.     

ENGINEERING ECONOMY CASES

This note extends the Initial partial-mean concept for present worth analysis of risk by Buck and Askin (1986) to a two random variable case where the magnitude of a single cash flow Is a random variable, and the time duration is a random variable with uniform distribution. This extension leads to the calculation of the expected magnitude of a project loss given that the loss occurs. Computational formulas and numerical Illustrations are presented.     

APPLICATION OF CHANCE-CONSTRAINED PROGRAMMING TO CAPITAL RATIONING PROBLEMS WITH ASYMMETRICALLY DISTRIBUTED CASH FLOWS AND AVAILABLE BUDGET

Most applications of chance-constrained programming are based on either normally distributed random variables or random variables with symmetric distributions such as uniform, which can be approximated rather accurately by the normal distribution. In this paper we study pure capital rationing with selection of the best project mix when cash flows and available budget are random variables with asymmetric distributions. We show that solutions obtained by chance-constrained programming using normality approximation for asymmetrically distributed random variables fail to satisfy budget constraints when cash outflows are skewed to the left, indicating that realized cash outflows are more likely to be higher than expected.     

On the Effects of Uncertainty on Investment Timing and Option Value

This article demonstrates that when the relationship between systematic risk and project value is taken into account, the sensitivity of investments with respect to volatility changes dramatically. By taking cash flows as a fundamental variable, the article shows that the value of an option to invest can be decreasing in volatility, contradicting the conventional wisdom. Second, the recent proposition, according to which the expected time to invest is U-shaped, does not generally hold; the expected time and the cash flow trigger are likely to be always increasing in volatility.     

A discounted cash flow approach to the base stock inventory model

A widespread approach to inventory modelling is to associate costs with measures of system performance and determine the control policy which minimises the long run average cost per unit time. This type of approach ignores the impact of a control policy on the timing of the cash flows associated with payments to suppliers and revenue streams from customers. The approach in this paper is to concentrate on cash flows and determine the control policy which maximises the expected net present value of the cash flows associated with a demand, valued at the time when that demand occurs. There is a Poisson demand process, a fixed lead time, unsatisfied demand is backordered and the system is controlled using a base stock policy. A solution procedure is given and a comparison is made with an equivalent simple interest model and with the standard cost model with linear holding and shortage costs.     

An Investment Analysis and Decision Making Framework for Real Estate Development*

Recent research analyzing real estate investment decisionmaking has concentrated upon existing income properties. Projects planned for future development have been analyzed as though they were completed and generating rental income. Such analysis has not considered the impact of development period decisions upon operating cash flow and hence project value. This paper proposes a framework for investment analysis which accurately reflects the interrelatedness of the development and operating periods of the real estate development process. A stochastic Markov process is used to develop a model which treats the development and operating periods as an integrated system. The resulting model allows project investment decisions to be made on the basis of a minimum expected profitability index distribution and/or terminal value.     

Municipal fiber in the United States: A financial assessment

Despite growing interest in broadband provided by municipally owned and operated fiber-to-the-home networks, the academic literature has yet to undertake a systematic assessment of these projects' financial performance. To fill this gap, we utilize municipalities' official reports to offer an empirical evaluation of the financial performance of every municipal fiber project in the U.S. operating in 2010 through 2019. An analysis of the actual performance of the resulting fifteen-project panel dataset reveals that none of the projects generated sufficient nominal cash flow in the short run to maintain solvency without infusions of additional cash from outside sources or debt relief. Similarly, 87% have not actually generated sufficient nominal cash flow to put them on track to achieve long-run solvency. In addition, 73% generated negative nominal cash flow over the past three fiscal years, leaving them poorly positioned to make up their deficits and causing them to fall farther into debt. An assessment based on the net present value of these projects' operating cash flow indicates that 53% of projects would not be on track to breakeven even assuming the theoretical best-case performance in terms of capital expenditures and debt service. Close analysis of these projects’ performance reveals that revenue generation likely plays a more important role in generating cash flow than efficiency in construction costs or operating efficiency.     

ON THE EQUIVALENCE OF NET PRESENT VALUE AND MARKET VALUE ADDED AS MEASURES OF A PROJECT'S ECONOMIC WORTH

The metric Economic Value Added, or EVA, has recently become quite popular for analyzing company balance sheets, determining executive compensation packages and even project selection. The analysis entails comparing net after-tax operating profit against the allocated cost of capital for a given period. This paper shows, in general, that Market Value Added (MVA), which is the present value of a series of EVA values, is economically equivalent to the traditional NPV measure of worth for evaluating an after-tax cash flow profile of a project if the cost of capital is used for discounting. Additionally, insight is provided into the rationale behind EVA analysis through an interpretation of its capital and income allocation procedure for investment projects.