Unconventional Cash Flows and NPV Measurements © Dr. B. C. Paul 2002 revisions 2008 Note – The subject covered in these slides is considered to be “common knowledge” to those familiar with the subject and books or articles covering the concepts are widespread.

Unconventional Cash Flows Have Big Impact  Negative cash flows at the end of the project challenge the concept of money growing in project  Destroyed the IRR  Can it harm NPV? (and dependent measures like PVR)  We are talking about NPV of the investment  On surface not effected  It can assume businesses will do things they can’t really do

Unconventional Cash Flows and NPV  As long as you have plenty of opportunities to invest at your required rate of return NPV is not effected  Who really cares whether the money grew in the project as long as your getting your return  Example – Barrick Gold Mining has 50 gold mines. One needs to be reclaimed so you take profits from other mines to pay for it  Who cares which part of the portfolio paid for it?  Problem comes up when money or opportunities to invest at the rate are not a dime a dozen

What if it Doesn’t?  Situation can occur often  Many businesses have developed specialties in one type of business or another - they are good at handling that type of risk  They may not be able to handle risk well in other lines of business  Money outside of project may not be able to be locked into long term commitments  Many businesses can make 2 or 3 times more in their field than in the general market

The Toxic Problem  NPV is done at a single interest rate  What happens if the negative cash flow event demands investing or saving at a lower interest rate  You’d have to put aside more money than NPV reflects