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Valoración de flujos de caja en inflación. El caso de la regulación en el Banco Mundial
[Cash Flow Valuation in an Inflationary World. The Case of World Bank for Regulated Firms]

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  • Vélez-Pareja, Ignacio

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

  • Vélez-Pareja, Ignacio, 2005. "Valoración de flujos de caja en inflación. El caso de la regulación en el Banco Mundial [Cash Flow Valuation in an Inflationary World. The Case of World Bank for Regulated Firms]," MPRA Paper 12507, University Library of Munich, Germany, revised 05 Jan 2009.
    • Handle: RePEc:pra:mprapa:12507
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    References listed on IDEAS

    as
    1. Estache, Antonio & Rodriguez Pardina, Martin & Rodriguez, Jose Maria & Sember, German, 2003. "An introduction to financial and economic modeling for utility regulators," Policy Research Working Paper Series 3001, The World Bank.
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    More about this item

    Keywords

    World Bank; regulatory policy for infrastructure; developing countries; project evaluation; project appraisal; firm valuation; cost of capital; cash flows; free cash flow; capital cash flow;
    All these keywords.

    JEL classification:

    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • K23 - Law and Economics - - Regulation and Business Law - - - Regulated Industries and Administrative Law
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities

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