By now present value calculations should be a matter of routine. However, forecasting project cash flows will never be routine. Here is a checklist that will help you to avoid mistakes:

1. Discount cash flows, not profits.
   1. Remember that depreciation is not a cash flow (though it may affect tax payments).
   2. Concentrate on cash flows after taxes. Stay alert for differences between tax depreciation and depreciation used in reports to shareholders.
   3. Exclude debt interest or the cost of repaying a loan from the project cash flows. This enables you to separate the investment from the financing decision.
   4. Remember the investment in working capital. As sales increase, the firm may need to make additional investments in working capital, and as the project comes to an end, it will recover those investments.
   5. Beware of allocated overhead charges for heat, light, and so on. These may not reflect the incremental costs of the project.
2. Estimate the project's incremental cash flows—that is, the difference between the cash flows with the project and those without the project.
   1. Include all indirect effects of the project, such as its impact on the sales of the firm's other products.
   2. Forget sunk costs.
   3. Include opportunity costs, such as the value of land that you would otherwise sell.
3. Treat inflation consistently.
   1. If cash flows are forecasted in nominal terms, use a nominal discount rate.
   2. Discount real cash flows at a real rate.

These principles of valuing capital investments are the same worldwide, but inputs and assumptions vary by country and currency. For example, cash flows from a project in Germany would be in euros, not dollars, and would be forecasted after German taxes.

When we assessed the guano project, we transformed the series of future cash flows into a single measure of their present value. Sometimes it is useful to reverse this calculation and to convert the present value into a stream of annual cash flows. For example, when choosing between two machines with unequal lives, you need to compare equivalent annual cash flows. Remember, though, to calculate equivalent annual cash flows in real terms and adjust for technological change if necessary.