I'm trying to find out the IRR in my DCF model, and I'm not sure what cashflow to use. On one hand, my instinct tells me to use the unlevered cashflow as that's what the DCF model uses, but I've been recommended to use EBITDA instead (without an explanation).
I'm wondering if any of you monkeys here can share some insights on this? thanks in advance!
EBITDA isn't a cashflow.
Depends if you're trying to get to an EV or a market cap as to whether you use FCFF or FCFE.
Correct -- FCFE for equity and FCFF for the enterprise (unlevered IRR). Don't use EBITDA.
Thank you for your comments, and that's what I thought initially too. However, when I calculate the IRR on IBM using FCFF, it's at only 1%. This doesn't seem very realistic...
Additionally in a DCF model, the generated enterprise value is essentially the NPV. However, a WACC of 1% comes no where close of making the NPV 0. I'm very new to this - I hope this isn't too rudimentary of a question
Why isn't 1% realistic?
Enterprise value doesn't give you NPV because you don't include the initial investment in the former.
Ah, I see - that makes a lot of sense sense.
The reason I said it seems unrealistic is because with a IRR of 1%, wouldn't that mean any discount rate over 1% would generate a negative NPV? And every discount rate (WACC) I've seen for companies is well over 1%.
Is the $176mm at Jan 1 22 the terminal value? Hard to evaluate when we don't know what the different items represent...
What is the -$210mm upfront?..
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