Question

Suppose the government proposes a relief package in an urgent attempt to bail out virtually all industries across the board and offset the economic damage unleashed by the 3-month long coronavirus [COVID−19] crisis episode, and indeed, keeps its promise. Required: By approximately what factor [in the long-run] are businesses likely to discount their negative cash flows, to work out how much is needed to level their current losses?

Further Instructions: Generally, I expect to see ‘some kind’ of formula or general rule, without much emphasis on quantitative values. Remember, this is an essay question, so, please feel free to express yourself as you please. I have allowed 40 lines per attempt (the maximum permitted by the system). All kinds of attachment file types are accepted. Though, voice notes are only considered supplementary at best (i.e. for support purposes). After all, I would much prefer to see something once than to hear about it a thousand times

Answer 1

Negative cash flows for a business generally are capital expenditures into assets. Discounting future negative cash flows means reduction in the future investments. So, the current losses should be leveled by discounting future negative cash flows.

Generally, the net present value of the future positive cash flows should offset current losses.

Reduction in negative cash flows can be considered as positive cash flows.

So, losses today should be equal to the present value of all the future cash flows.

Considering in long run, PV of future cash flows as infinite series of GP then it can be said that

(Reduction in capital expenditure)/(Cost of equity) = Losses today

So to offset the losses today the reduction in the capital expenditure each year should be

(Cost of equity)*(Loss amount).