Redesigning CapEx Strategy by Fredrik Weissenrieder

Author:Fredrik Weissenrieder
Language: eng
Format: epub
Publisher: McGraw Hill LLC
Published: 2023-01-15T00:00:00+00:00

PRIMER ON ACCUMULATED DISCOUNTED CASH FLOWS AND CURVES

It’s been our experience that the best way to literally see the differences between various capex strategies is to use a compelling visual. Our weapon of choice is accumulated discounted cash flow curves (or just “cash flow curves”). This metric isn’t just a powerful graph but one that allows the team to instantly understand the costs and benefits of one collection of capital allocation decision chains against another, useful in the short, medium, and long term. It allows the team to quickly track the momentum of cash flows over the time period considered. It’s an important tool that lets the team quickly answer such questions as: Are we adding value by increasing our competitiveness and long-term sustainability? Are we merely “harvesting” value at this point? Are we investing a substantial amount of time and resources but in return for gaining little ground? Should we invest a little to get a little or invest a lot to gain much more?

As we’ve discussed, one-dimensional metrics—NPV, payback, IRR, and so on—are the go-to metrics for typical capex analyses of individual projects (but they’re fundamentally the wrong tools for the job). In the context of cash flow curves, those metrics also fall short because they’re insufficient when ranking full-scale capex strategies against each other: they lack the ability to capture how a capex strategy reaches a certain value over time.

To explain accumulated discounted cash flow curves, let’s use yet another fictional company; this time, Really Big Steel. The company projects that its production portfolio will earn $100 a year over the next 10 years, shown simply in Table 5.1.

Table 5.1

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