Capital Budgeting (What year 0 truly means?)

CFA Level II Corporate Finance
#1

Hello guys, sorry to bother but I can not find an answer to a really basic question, apologies also for the mistake I could make writing in english as it is not my mother tongue

Imagine a valuation of a project with expected cash flows ranging from year 0 to year 5. Year 0 takes into account investing cash flows and year 1 to 5 operating cash flows. For example, -100;+100;+100;+100;+100;+100

It seems that the convention is to discount the investing and operating cash flows as if they were registered at the beginning of period (i.e. beginning of each year) to arrive to a valuation of the project. The NPV of the example above would be 279 using this method

I could imagine investing cash flows taking place at the beginng of year 0… but I think operating cash flows are calculated on an end-of-the-year basis. Therefore the Year 1 100 cash flow from my example above should have to be discounted back two periods (year 0 and year 1) insted of just one period (year 0) to calculate its present value,

why anybody does this?

In the section 5.1 of CFA level II Volumen 3 is stated that the operating cash flows of the example are calculated using an end-of-the-year basis but then the project valuation consider them as of they were calculated at the beginning of the year (the NPV is 162,217)

am I missing something?..

Thank you,

#2

if everything is consistently considered at a end of year basis

e.g.

you invested $100 for your project somewhere during 2014. But you evaluated it at end of 2014.

The $100 Operating Cash flow in 2015 - was evaluated at the end of 2015.

So

2014 = -100

2015 = +100

you need to TVM the + 100 for 1 year now.(to get it in 2014 terms).

#3

I am evaluating prospective costs,

e.g. I want to valuate the constructon and operation of a telecommunication network at the beginnig of 2015.

I have to invest $100 on jan-2015 to build the infrastructure.

The construction phase lasts a year (i.e. Operation will start at the begging of 2016)

The operating cash flow is expected to be $100 ath the end of 2016

2015:-100

2016:+100

I am starting to consider that my problem is that the time for construction of a project’s fixed capital is not usually considered in the regular template for evaluating capital budgeting decisions.