Estimating Cash Flows for Project Appraisal and Firm Valuation
Ignacio Vélez-Pareja1
School of Economics and Business Administration
Instituto de Estudios para el Desarrollo, IDE
Universidad Tecnológica de Bolívar,
ivelez@unitecnologica.edu.co, nachovelez@gmail.com.
Joseph Tham2
Duke Center for International Development DCID,
Sanford Institute of Public Policy
Duke University
ThamJx@duke.edu.
February 23, 2010
1
Associate Professor, School of Economics and Business Administration, Universidad Tecnológica de Bolívar, Calle del
Bouquet # 25-91, Cartagena, Colombia. Ph. (575) 6606041.
2 Visiting Assistant Professor, Duke Center for International Development DCID, Sanford Institute of Public Policy,
Duke University – Box 90237, Durham – NC 27708-0237 – USA. Ph: (919) 613 9234
Cost of Capital: An Introduction
Ignacio Vélez-Pareja – Joseph Tham
Abstract
This teaching note is devoted to the definition and calculation of cash flows,
namely, cash flow to debt, (CFD), cash flow to equity, (CFE), capital cash flow, (CCF),
tax savings, (TS) and free cash flow, (FCF). We use the direct and the indirect methods
to derive the relevant cash flow profiles for the different stakeholders. These cash flows
are the basis for the valuation of a firm or project.
2
Estimating Cash Flows for Project Appraisal and Firm Valuation
Vélez-Pareja and Tham
Estimating Cash Flows for Project Appraisal and Firm Valuation
Introduction
Forecasting financial statements for the firm is imperative for management
because it provides insight into the company's future performance. It is a very important
tool for developing strategies to anticipate and overcome the cash flow difficulties that
always arise.
Most firms in the world are unlisted. More than 99.5% of the firms do not know
their market values. On the other hand, the management for a listed firm knows the
value of the firm every single minute. The name of the game is value. For management,...