Český finanční a účetní časopis 2008(2):21-30 | DOI: 10.18267/j.cfuc.266

Usual Errors Evaluation of Investment Projects with Discounted Cash Flow Method

Josef Valach
Prof. Ing. Josef Valach, CSc. - profesor; Katedra financí a oceňování podniku, Fakulta financí a účetnictví, Vysoká škola ekonomická v Praze, nám. W. Churchilla 4, 130 67, Praha 3, Česká republika.

Investment appraisal methods by using of discounted cash flow have been more often applied to firm's projects evaluation in developed countries and also in Czech Republic. However at their application in practice various errors are often observed which unfavorably influence on quality of projects evaluation. Wrong proceedings appear especially at quantification of cash flow from project and at a selection of required rate of return. Capital expenditures are often considered in a strict sense, only in form of investment costs recorded in accounting. They do not include various further expenditures connected with investments and necessary for complex evaluation of project. Also net operating cash flow from project often do not take into consideration principle of increasing, inflation influence, they are often very optimistic and do not respect some further principles of capital planning. Required rate of return is not always in symmetric relation with calculation of net operating cash flow. Cost of debt as a part of required rate of return is incorrectly identified only with interest and not in respect of short term credits, which are repeating permanently.

Keywords: Cash flow from a project; Capital Expenditure; Net operating cash flow from a project; Required rate of return.
JEL classification: G30

Published: June 1, 2008  Show citation

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Valach, J. (2008). Usual Errors Evaluation of Investment Projects with Discounted Cash Flow Method. Czech Financial and Accounting Journal, 2008(2), 21-30. doi: 10.18267/j.cfuc.266
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