9  Valuation of investments and projects

Let us now look at investments in real assets such as real estate and machinery. Real estate will be treated in more detail in the next chapter. The main difference between real and financial assets is depreciation, which is tax deductible. We therefore have to adjust for the tax effect arising from depreciation in order to find the correct after-tax cash flow. Let us start with a very simple valuation of an investment. Later, we will discuss the size and calculation of the cost of capital (also known as the discount rate). We have to consider both tax and inflation to make accurate investment decisions.

Example 9.1

The company Joe Louis & Sons is considering a seven-year investment in a machine that ...

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