DCF Question: How valuation changes if I buy a factory with $100 cash?

pithikos's picture
Rank: Chimp | banana points 9

Hello everybody,

I am working on a valuation question I found in one of the popular interview guides. The question asks me to evaluate the impact on the DCF valuation from the purchase of a factory with $100 cash on year 4 My answer was not similar to the one I found on the guide so I would appreciate if anybody could point out the flaw in my thinking:

- At year 4 I have Unlevered free cashflow UNCHANGED because Capex goes up by 100 but Change in NWC goes down by 100. so
- 100 - (-100) = 0.
- Assuming marginal tax rate 't', salv value = 0, useful life = 5 yr, then I have 5 tax shields on yrs 5 ... 9 each of which is 20*t. By discounting those 5 tax shields from depreciation using WACC I get the increase in DCF valuation.

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Comments (3)

Jan 1, 2013

Um shouldn't NWC stay the same? (assets should stay the same).

Jan 1, 2013

Isn't cash, marketable securities & short term investments line item on the Balance Sheet part of NWC?

(don'f forget the definition of NWC = Current Asstes - non interest bearing Current Liabilities)

Jan 1, 2013