The Research On Cash Flow And Discount Rate Estimation In Investment Decision-making Of HY Projects

Pharmaceutical industry has long maintained a high growth rate and held an importantposition in the national economy. Currently, under the background of favorablepharmaceutical and healthcare industrial policies in China and transformation of new-versionGMP in the industry, all leading pharmaceutical manufacturers have engaged themselves ininvestment and construction of new production bases. However, according to investigation, inreality, most of the methods used in estimating cash flow and discount rate of chemical agentpharmaceutical projects (hereinafter referred to as “HY Projects”) are incorrect and involveirrational behaviors. After reviewing literature, no study on estimation of variables ininvestment decision-making of HY Projects has been founded for the time being. Therefore,based on behavioral fiance theory, this paper studies estimation of cash flow and discount ratein investment decision-making of HY Projects and this study will be of great practicalsignificance.Firstly, in this paper, through the survey and interview method,10pharmaceuticalprojects in reality are surveyed,15relevant staff from decision-making department, financialanalysis department and implementation department of a large Guangzhou pharmaceuticalgroup are interviewed, information such as investment characteristics, specific form ofrisk, selection of decision-making indicators, composition and estimation method of cash flow,value determination of discount rate and its basis etc. is collected, and irrational behaviors inthe estimation process of cash flow and capital cost in reality are summarized.Then, aftercomparison and analysis, the paper selects more operable and accurate cash flow estimationmethod and capital cost estimation method, designs cash flow estimation table of HY Projectsthrough the direct method and estimates capital cost of HY Projects based on BAPM. Lastly,the paper applies the designed cash flow estimation table of HY Projects to cash flowestimation of BS pharmaceutical project, and then, by using the capital cost estimated, itcalculates the net present value and internal rate of return of the BS pharmaceutical project.Through the study, it is found out that: the8specific risks of HY Projects arenon-systematic risks that have great impact on the project and their impact on the value maybe reflected through cash flow adjustment; meanwhile, there are9common irrationalbehaviors in cash flow estimation process of HY Projects and3common irrational behaviorsin capital cost estimation process. In addition, cash flow estimation table at the beginning, themiddle and the end of the period of HY Projects are designed in this paper, which may beused as reference by other projects. Further, it is found out in this paper that, in reality, value of discount rate of HY Projects are concentrated within the range of10%-15%; while therisk-free rate of return of Chinese market calculated based on BAPM is3.60%, the estimatedvalue of market risk premium is9.65%and Beta of HY Projects is0.5530, therefore, thecapital cost of HY Projects is8.93%, which is consistent with research conclusions of otherresearch teams and thus may be considered as discount rate in investment decision-making ofHY Projects Lastly, the paper applies the cash flow estimation table of HY Projects and thecomputed result of capital cost to the BS pharmaceutical project, and by using NPV and IRRfunctions in EXCEL, it works out net present value RMB262,910,000,of the BSpharmaceutical project and internal rate of return13.19%of the project. Compared with theresult calculated from traditional method, it can be seen that, as the value of discount rate intraditional method is12%which contains non-systematic risk, and the interest expense RMB70,300,000is included into the incremental cash flow without taking into account theincremental cash flow RMB37,620,000of residual value of intangible assets to be recoveredat the end of the period, the net present value calculated has a difference of RMB328,030,000with the result calculated in this paper and the difference ratio is56.59%. This indicates thatthere’s a large difference between the calculation method stated in this paper and thetraditional method, and it is very necessary to improve the traditional method used inestimating cash flow and discount rate of HY Projects.In conclusion, this paper works out a more practical and operable method for estimationof cash flow and capital cost of HY Projects. And this method can be used as a reference ininvestment decision-making of other HY Projects to improve the decision-making quality.