Let's say you had a cashflow with a discount rate of 5% and an inflation of 2%. I understand the discount rate is assuming you could have generated 5% with that money if you had invested it elsewhere, but isn't this ignoring inflation? Therefore, the present values generated at any given part of the cash flow are wrong. Because it's ignoring the inflation that would be eating away at your profits?
Also, doesn't having a discount rate higher than your inflation suggest your investment is constantly losing value, assuming no other movements? My investment revenue would be inflating 2% every year, but I could have just made 5% instead.
Thanks.
Ive seem some people use NPV models and some use the DCF model. The DCF model can be a lot more complex, but overall, what are the benefits and drawbacks of using each of these models, and which one is more common for evaluating future cash flows.
Today Ginkgo announced a collaboration with Selecta Biosciences per the link to the press release below:
I think this continues to show a favorable trend for Ginkgo in that if you remember wayyyyy back to the May 21st 2021 investor day presentation the value assigned to projects, their NPV, was $15million. Even if this 15million NPV continues to be the norm, so long as Ginkgo continues to line up new programs at the rate of growth detailed in their May 21st 2021 investor day presentation, then this is still a very favorable trade at the SPAC enterprise value of $15 billion. Do keep in mind that SPAC projections can sometimes be optimistic, but Ginkgo did revise their projects up for the 2021 year as part of their Q3 earnings presentation.
Ok so, more projects, and what's the deal with this NVP. Well take a look at this quote from the Selecta press release:
>Under the terms of the collaboration, Ginkgo is eligible to earn upfront research and development fees and milestone payments, including certain milestone payments in the form of Selecta common stock. In addition, Ginkgo is eligible to earn clinical, regulatory and commercial milestone payments of up to $200 million in cash for each of a specified number of products, which have the potential to total, in the aggregate, up to $1.1 billion. Ginkgo is also entitled to potential further downstream value in the form of royalties on sales.
If this one collaboration can potentially total $1.1billion then that is potentially more than the value of all of Ginkgo's major projects (54) from 2017-2020 per the May 21st investor day presentation page 40. I say potentially as the presentation specifies NPV separately, while this collaboration likely includes foundry and what would be considered NPV in the one figure once all work is complete. This collaboration would need to include a minimum of $290million foundry revenue to not have a NPV, once al
... keep reading on reddit ➡In npv calculation if we get a negative cashflow before tax what are we supposed to do?
In today’s exam i got negative cashflow in first year and i calculated tax but due to stress or whatever i accidentally added it (basically the tax answer was in negative due to me multiplying negative cashflow with tax rate and i AGAIN subtracted that answer from cashflow so it probably got added in the calculation instead of getting subtracted). How many marks would i end up losing because of this blunder?
calculation of other years was correct or so i would like to think lol
So I add taking a loan in the t=0 and then extract interest and principal payments in later periods. At the end I get a bigger NPV. I guess I messed up in corporate tax then so I tried to manipulate it by adding principal and/or interest rate to the cashflow. But at best my NPV'' is equal to the initial one.
Edit: I guess it's the fact that I used the same discounting rate as interest rate of my debt. I'll try to increase it.Edit: or vise versa - discounting rate should be lower than interest, it's basically like bonds
What is “NPV Revenue $” and “NPV Margin $” and “NPV Margin %”? in the context of a power efficiency (i.e.electricity efficiency) project undertaken by a electric fixtures company for reducing utility bills for it’s clients buildings? The savings on the utility bills of the clients will be passed on to the electric fixtures company in the form of yearly contract payments for 5 years after installations. The above mentioned NPVs are calculated by the electric fixtures company to check the profitability of undertaking a retrofitting project as it has to incur all the initial retrofitting/installation charges (i.e. initial Cash Outflow).
Hey everyone,
Ill get right to the point:
I study economics and I've done my fair share of NPV calculations which are usually no issue whatsoever.
Recently, however, I tried appliying it in real life but I'm not sure I'm doing it correctly.
So let's take theoretical values and I will walk you through my process and maybe someone can tell me where Im going wrong, if I am. Also, for this example, let's assume we're in real estate. Because of this, I decided to go with the perpetuity formula instead of the annuity one.
So lets say I have an initial investment of 4,000,000 Euro
I have annual Cash Flows of 350,000 Euro
In order to find the the required rate of return (RRR): (350,000/4,000,000)+0.025 = 0.1125
I decided to go with 2.5% as the growth rate to offset inflation (which I just assume to have an average level of 2.5%). So I am not sure if this makes sense and if it doesn't, what else I should put there instead.
Finally, I get this:
NPV = -4,000,000 + (350,000/0.1125)
NPV = -888,888
Simply by looking at this result, it feels like I went wrong somewhere. The annual CFs are almost 10% of the initial investment (which sounds pretty good to me?) but the NPV is hugely negative. With these numbers I would expect it to be higher, especially considering the fact that I am looking at a perpetuity here...?
Another thing I can't quite wrap my head around is the fact that the higher the growth rate of the cash flows, the more negative the NPV becomes.
I was also considering to use WACC but I am not sure how I would get real-life cost of equity and cost of debt.
Alright, I'm looking forward to any responses - Thanks! :)
We've all seen what happened last week. The impact SPUT had so far exceeded even my wildest expectations. If things continue along a similar trajectory for a year or so, outlandish projections of a $200+ spot price won't be so outlandish anymore.
Just for fun, I decided to see what happens to a DCF model of my favourite, highly leveraged developer Bannerman Energy, if we ever reach ~$200/lb contracting price. I focused on the starter phase, Etango-8 which has ~58Mlbs of the mineable reserve. Bear in mind that Etango deposit has a whooping ~227Mlbs U in total.
So, according to my calculations, the After-Tax NPV8 @ $200 for the Etango-8 phase is an incredible ~$2.4B. Remember, we are talking about just the starter mine!
I haven't crunched the full DCF model for the full Etango project yet because the DFS assumptions for that one are a bit old by now. However, just for fun, we can try to extrapolate the full mine NPV from the Etango-8 numbers. If we extrapolate linearly by using the Etango-8's NPV8 / lb of the reserve at $200 of approximately $41/lb (in plain speak, every lb of mineable reserve contributes ~$41 of Etango-8's NPV8@200), we get a total full Etango NPV8@200 of ~$9.4B or roughly a 47-bagger(???) from here. Yes, you read that right.
Disclaimers:
- It's important to keep in mind that spot price != contract price. When modelling cash flows you should conservatively assume a decent gap between spot and term. In practice, this means that for the input parameter of $200/lb term price, the spot price will have to strongly exceed $200. I wouldn't count on it, but IMHO can't exclude it anymore ;)
- The simple extrapolation from the starter project to the full mine assumes that costs scale linearly with the size of the mined reserve. This assumption is often wrong. Hence one should treat this purely as a back of envelope estimate
- The above is a just-for-fun exercise - not investment advice. Let me know if your numbers look similar
Conclusion: Having said all of that, even taking into account the above disclaimers, the peak valuations are likely going to be far in excess of EV / NPV = 1. They aren't going to be based on cash flows, but sentiment. So, seeing that even by pure maths it's likely a 10+x bagger, $BMN is very likely going, quite literally, to the moon!
For some reason I'm having trouble wrapping my head around this concept. Any tips/sources on dumbing this down? I'm probably overthinking it but it stumped me on the first time around on the test. Round 2 is in a few weeks. Thanks!
Hi, I am having trouble understanding the NPV and FV concept without having to calculate.
According to the Kaplan Study Book the exam has a few questions about this. Is that true?
Any guidance is helpful.
Thank you!
Hey everyone,
Ill get right to the point:
I study economics and I've done my fair share of NPV calculations which are usually no issue whatsoever.
Recently, however, I tried appliying it in real life but I'm not sure I'm doing it correctly.
So let's take theoretical values and I will walk you through my process and maybe someone can tell me where Im going wrong, if I am. Also, for this example, let's assume we're in real estate. Because of this, I decided to go with the perpetuity formula instead of the annuity one.
So lets say I have an initial investment of 4,000,000 Euro
I have annual Cash Flows of 350,000 Euro
In order to find the the required rate of return (RRR): (350,000/4,000,000)+0.025 = 0.1125
I decided to go with 2.5% as the growth rate to offset inflation (which I just assume to have an average level of 2.5%). So I am not sure if this makes sense and if it doesn't, what else I should put there instead.
Finally, I get this:
NPV = -4,000,000 + (350,000/0.1125)
NPV = -888,888
Simply by looking at this result, it feels like I went wrong somewhere. The annual CFs are almost 10% of the initial investment (which sounds pretty good to me?) but the NPV is hugely negative. With these numbers I would expect it to be higher, especially considering the fact that I am looking at a perpetuity here...?
Another thing I can't quite wrap my head around is the fact that the higher the growth rate of the cash flows, the more negative the NPV becomes.
I was also considering to use WACC but I am not sure how I would get real-life cost of equity and cost of debt.
Alright, I'm looking forward to any responses - Thanks! :)
