Cash Flow Valuation in an Inflationary World. The Case of World Bank for Regulated Firms

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.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