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Gold/Mining/Energy : Corner Bay Silver (BAY.T) -- Ignore unavailable to you. Want to Upgrade?

To: Little Joe who wrote (441)	11/22/1999 11:00:00 AM
From: marcos	Read Replies (2) \| Respond to of 4409

This explains the concept thoroughly in other words - javeriana.edu.co -g- .. starts here - javeriana.edu.co .. no frames - javeriana.edu.co what a morning - bay +.32, jdx halted ... now if only i could get SW's damn java charts to work!! .. aaargh

To: Little Joe who wrote (441)	11/22/1999 11:44:00 AM
From: Claude Cormier	Respond to of 4409

The present value of future cash flows is called "net present value" or NPV. Let say the cost of your investment is $10M. Let also assume that this investment will generate $10M of cash flow in year 1 but nothing in following years. Since these cash flows are immediate, they are not discounted. In other words, the discount rate is 0% for the first year.. this means that the NPV is also $10M. Since the investment = $10M and NPV is also $10M, the return on investment is 0% as the discount rate needed to balance this equation is also 0%. That make sense as if you spend $10M to gain $10M, you get nothing. In a similar way, if the net cash flows are $10M in the first year and $10M in the second year but nothing in the followings years, the NPV has to be different. We know that the 1 year cash flows are not discounted. But second year cash flows must be as a dollar earned a few years down the road is not worth a doillar earn today. To find the good discount rate that will balance the equation: Cost of investment = NPV We must use the trial an error process. In our case the number are such that we can already figure out what discount rate we need. We must solve the equation for "x", the discount rate. $10M = $10M + (100-x)($10M)/100 Cost = Year1 cash flows + discounted year2 cash flows In other words, what is the rate at which the cost will equal all future cash flows. If we try 50%: We get $10M = $10M + (100-50)($10M)/100 $10M = $10M + $5M $10M = $15M which does not balance Obviusly 50% is too small a discount rate. Lets use 100. $10M = $10M + (100-100)($10M)/100 $10M = $10M + 0 it balances So the definition says that the IRR is the discount rate at which the present value of the future cash flows of an investment equal the cost of the investment., in other words, in our case 100%. The IRR is a guide to profitability and that is it. That is the way I undersatnd it. Now to calculate the value of an investment... analysts use a discount rate that approximate the total of the current interest rates and inflation rate. The logic is that if you financed your project, you gonna pay x% on your financing per year and lose y% on your investment due to inflation. I use x=6% and y=2% for a discount rate of 8%. SO if I want to calculate the net present value of in the example above here is the way to do it: 1) Net cash flows in year 1: Costs= $10M Cash FLows = $10M Net cash flows Y1 = $10M-$10M - 0 No discount in year 1 2) Net cash flows in year 1: Costs = 0 Net cash flows = $10M Net cash flows Y2 discounted at 8%= $10M * (100-8)/100 = $9.2M 3) NPV = Y1 +Y2 = 0+$9.2M = $9.2M That is it... Of course there is more to the equation... taxes, depletion and all the various will help you to calculate the net cash flows. Now you have heard the term net asset value (NAV) which is the difference between the net assets and the net liabilities, in other words the liquidative value. In the case of a junior mining company that has only a deposit as its main assets and no debt... the NAV will be equal to the NPV. Some analysts mentioned the NAV in their reports others mention the NPV. Sometimes they are the same thing. On other they are not. As long as you know the diffrence. That is the way I understand it. I hope this helps.