Corporate Finance Spring 2025 - Session 12: Incremental, time-weighted Cash Flow Returns

We started this session with a discussion of the right hurdle rate for the Rio Disney theme part, and argued for using the cost of capital for theme parks, adjusted for country risk. We then moved on to looking at accounting returns both for the project and at the company-level as a measure (crude, but still useful) of whether a company is earning more or less than its cost of capital, Returning to the project, we looked at the adjustments that need to be made to get from earnings to cash flows (depreciation, cap ex and working capital) and from cash flows to incremental cash flows (sunk costs, allocated expenses) and then to time-weighted incremental cashflows (discounting and time value). We concluded that the Rio Disney project is a good one, both in terms of NPV and IRR, We ended the class by examining why switching the currency to Brazilian reals has no effect on NPV, since both the discount rate and the expected cash flows are changed by the expected inflation differential. Slides: https://nyu.box.com/s/p5p1jrfi5brzfn3oeek9xcfckq6wzy81 Post class test: https://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/postclass/session12test.pdf Post class solution: https://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/postclass/session12soln.pdf