- July 2, 2023 at 5:25 pm #687570cxr83aParticipant
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This is a practical question that I appreciate may be unlikely to come up in an exam but is of relevance in practical application and I would hugely recommend appreciate your help in establishing the best approach:
When preparing a DCF for a 3 year construction project, that has fixed income per period (based on a lump sum construction contract) and individual operating cash flows already inflated at specific rates based on current economic estimates (eg labour 5%, materials 10%, expenses 7%, comping), what would be the most appropriate discount rate to use?
I plan to use taxation in my model.
In terms of working capital, I plan to use a10% value based on sales, but given the project finishes in year 3 yet the retention won’t be received until year 5, should I continue to show working capital equal to the retention value in year 4?
I hope you can help, thanks in advance and please feel free to point me to any notes or lectures that cover this is I’ve missed them.
Thank you!July 3, 2023 at 9:08 am #687586John MoffatKeymaster
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The discount rate should be the cost of capital for the company (which obviously depends on how it is financed).
As far as the retention is concerned, what you have written seems the most sensible approach.
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