Creación de valor: las marcas y el posicionamiento

Future cash flows can be estimated either in today’s money and are usually termed cash flows in real terms, or in the money of the date (year) in which they occur and are termed as monetary or nominal cash flows. It is usually easier to predict future cash flows in real terms, i.e. today’s money, because today’s information is the best available. Utilising real terms will eliminate the need to predict another future factor – inflation – thereby reducing the number of the unknowns.

Nominal cash flows are quite important for commercial financial statements and accounts. They are used in the prediction of financial statements allocations (depre- ciation, interest, etc.), in order to arrive at gross profits and net profits (after allowing for taxation and similar outlays). To arrive at nominal cash flows, predicted real cash flows have to be inflated by the expected inflation rate.

In present valuing, a real discount rate has to be utilised if cash flows are in real terms (today’s money). A nominal (monetary) discount rate is utilised if cash flows are in monetary terms that are in the money value of the year in which they occur. A nominal discount rate is equal to the real discount rate modified by the inflation rate:

Table 3.2 NPV – nominal terms Year Nominal cost Nominal income Nominal net benefits Nominal discount factor Net benefits discounted at 15.5% −1 38.1 — −38.1 1.155 −44.01 0 110.0 40.0 −70.0 1.000 −70.00 1 10.5 42.0 31.5 0.866 27.27 2 11.0 44.1 33.0 0.750 24.79 3 11.6 46.3 34.7 0.649 22.54 4 — 85.1 85.1 0.562 47.81 Net present value: £8.41

Suppose, for instance, that a real discount rate, which allows for real return and a risk of 10 per cent, is adopted. Inflation is expected to be 5 per cent in the future.

Then the nominal discount rate will equal

[(1 + 0.1)(1 + 0.05)] − 1 = 0.155, i.e. 15.5 per cent.

Because of their small values and as an approximation, a nominal discount rate equals the real discount rate plus inflation. If cash flows are in real terms then real discount rate is utilised. If they are in nominal terms then the nominal discount rate is employed. Net present value is the same when utilising both methods.

The cash flows of Table 3.1 can be presented in nominal terms by inflating them by the annual inflation rate of 5 per cent as in Table 3.2.

This is the same result as that of Table 3.1, which indicates that the real and nominal cash flows will give the same net present value if the real and nominal discount rates are properly utilised with each cash flow respectively.

It has to be noted that the expenditure in the year (−1) in Table 3.1 was £40 in the money of the base year (year 0). This is only equal to £38.1, i.e. [£40÷ (1 + 0.05) inflation rate], in the money of year−1. The same applies to the estimate of the salvage value, which is estimated at £70 in money of the base year and is equal to (70× [1 + 0.05]4)= £85.1 in the money of year 4.

In most of the analysis of this book, it is the real cash flows and the real discount rate that will be used to discount streams of income and expenditure (past as well as future). When values are available in the money of the day of the transaction (like fixed rent values, payments for fixed rates and tariffs, fixed price fuel contracts, etc.), then these values have to be deflated to the base-year money, and then discounted by the real discount rate to their present worth.

In many power-generation projects it is the commissioning year of the project that is termed as the base year. Prior to the base year many payments, usually project investment cost, have already been incurred. These have first of all to be presented in the money of the commissioning year, then to be compounded (discounted) to their present value by multiplying them with the compounding factor (1+ r)n. This is

the same as multiplying them by the discount factor 1/(1+ r)−n, where n here is negative because it is prior to the base year. Cash streams occurring after the base year (commissioning date), have to be presented in the base-year money and discounted by multiplying them with the discount factor 1/(1+ r)n. Therefore, the discount factor[1/(1 + r)n] is universal for all cash flows with n as negative for all flows prior to the base year, positive for all flows after the base year, and zero for the base year. For the ease of treatment, the term ‘discounting’ will be universally used for both ‘compounding’ and ‘discounting’.

In the past analysis, we have assumed that price changes of operating costs as well as revenues are going to change over time (inflate) at the same rate. This may not be true in many cases, since relative price changes do often occur. Different cost categories, like fuel costs, may have different rates of change over time from other costs like labour or other materials. In this case, future streams are presented in nomi- nal terms utilising each cost or income item, and its expected inflation rate. Real cash flows are obtained by deflating these by the average annual inflation rate expected during the projected period. Alternatively, the project cash flows are presented in real terms with the stream of the cost or income item(s) expected to significantly deviate from the average annual inflation rate, inflated (deflated) by the inflation differential between its anticipated inflation rate and that of the average annual inflation rate.