DCF - how to consider investments?
It seems that I forgot all that I knew some years ago :( fortunately, you guys are here to help
I have to model a quite simple (and overly simplistic) project: the company starts operations with 70 equity and 30 debt, invests all 100 into buses that then spit revenue for 10 years. I need to calculate project NPV and IRR and the same for the equity holders.
So I calculated FCFF and FCFE for all years and then calculated IRR for equity holders as (-70) in year 0 (=beginning of year 1 but not discounted) then relevant FCFE in years 1-10, same for project IRR.
Now the issue I face is that if the company only invests in the buses at the end of year 1, then my FCFE and FCFF for year 1 consider the -100 cash flow from investments. But if these investments are made right at the start of the year (year 0), then it doesn’t show up in the DCF, so my IRRs are way higher.
I intuitively feel that investing in year 0 makes complete sense, but I still can’t figure out why the IRR impact is so huge. Or should I consider the -100 investment somewhere in FCFE in year 1?
Not sure I’m being clear, but hopefully you can help.
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