Discounted future cash flows?

Oliver Wyman case: On the Right Track
New answer on Nov 06, 2019
2 Answers
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Enrico asked on Nov 05, 2019

Hello,

I have a question regarding the future cash flows in this exercise. It seems to me that future incomes and expenses (year 1 to 6) are dealt with without a discount factor. Is this a reasonable assumption? It's more complex, but I would have divided future cash flows by (1+p)^n, p being the discount factor and n the year.

Thanks in advance.

Enrico

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Giacomo
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updated an answer on Nov 05, 2019
Bain & Company | MBA | Real Case Simulation

Ciao Enrico,

you are right that normally is more correct consider a discounted cash flow in NPV calculation.

However, in most of the interviews you can make the assumption to neglect the discount factor. I would recommend to ask the interviewer if you can assume negligible the following factors:

  • Discount factor (K)
  • Cash flow growth (g)
  • Terminal value (TV) of the investment

Then the interviewer will guide you and more important you will show your complete understanding on the matter.

Feel free to contact me in private for further clarification

(edited)

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Taha
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replied on Nov 06, 2019
BCG | F500 Strategy | Ex-OW FS Consultant | Booth MBA

Happy to answer this one.

As long as you can communicate this assumption upfront to the interviewer you should be good with either approach. Typically, once you state your thought process, the interviewer will guide you on how to proceed. 9/10 times you will be able to get away with the simplified approach of ignoring the discounting.

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Giacomo

Bain & Company | MBA | Real Case Simulation
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