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Cash Flow Valuation in an Inflationary World. The Case of World Bank for Regulated Firms

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  • Ignacio Velez-Pareja

Abstract

We show that project evaluation should be based on free cash flows at nominal prices. We present a case where the results from the constant price method are biased upwards and there is a risk to accept bad projects. It is a widespread practice to evaluate projects at constant prices. With an example presented in the training on economic regulation of public utilities developed by the World Bank Institute we asses that methodology. We show an overvaluation of 21% when compared with the current prices methodology and using a correct Weighted Average Cost of Capital, WACC.

Suggested Citation

  • Ignacio Velez-Pareja, 2005. "Cash Flow Valuation in an Inflationary World. The Case of World Bank for Regulated Firms," Proyecciones Financieras y Valoración 2109, Master Consultores.
    • Handle: RePEc:col:000463:002109
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    References listed on IDEAS

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    1. Goldschmidt, Yaaqov & Yaron, Jacob, 1991. "Inflation adjustments of financial statements : application of international accounting standard 29 : financial reporting in hyperinflationary economies," Policy Research Working Paper Series 670, The World Bank.
    2. Richard S Ruback, 2002. "Capital Cash Flows: A Simple Approach to Valuing Risky Cash Flows," Financial Management, Financial Management Association, vol. 31(2), Summer.
    3. Joseph Tham & Ignacio Vélez Pareja, 2004. "Top 9 (Unnecessary and Avoidable) Mistakes in Cash Flow Valuation," Proyecciones Financieras y Valoración 3648, Master Consultores.
    4. Ignacio Vélez-Pareja & Antonio Burbano-Pérez, 2006. "A Practical Guide for Consistency in Valuation: Cash Flows, Terminal Value and Cost of Capital," Economic Analysis Working Papers (2002-2010). Atlantic Review of Economics (2011-2016), Colexio de Economistas de A Coruña, Spain and Fundación Una Galicia Moderna, vol. 5, pages 1-16, June.
    5. Tim Coelli & Antonio Estache & Sergio Perelman & Lourdes Trujillo, 2003. "A Primer on Efficiency Measurement for Utilities and Transport Regulators," World Bank Publications - Books, The World Bank Group, number 15149.
    6. Ignacio Vélez Pareja, 1999. "Project Evaluation in an Inflationary Environment," Proyecciones Financieras y Valoración 3391, Master Consultores.
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    Cited by:

    1. Ignacio Vélez-Pareja & Joseph Tham & Viviana Fernández, 2005. "Adjustment of the WACC with Subsidized Debt in the Presence of Corporate Taxes: The N-Period Case," Economic Analysis Working Papers (2002-2010). Atlantic Review of Economics (2011-2016), Colexio de Economistas de A Coruña, Spain and Fundación Una Galicia Moderna, vol. 4, pages 1-19, October.
    2. Ignacio Vélez-Pareja & Rauf Ibragimov & Joseph Tham, 2008. "Constant Leverage And Constant Cost Of Capital: A Common Knowledge Half-Truth," Estudios Gerenciales, Universidad Icesi, June.

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    More about this item

    Keywords

    World Bank;

    JEL classification:

    • M21 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics - - - Business Economics
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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