Chapter 2: Project CashFlowsThe definition, identification, andmeasurement of cash flowsrelevant to project evaluation.   ...
Why Cash Flows? Cash  flows, and not accounting  estimates, are used in project  analysis because:-1. They measure actual...
The Meaning of RELEVANTCash Flows.A    relevant cash flow is one which    will change as a direct result of the    decisi...
Cash Flows: A Rose By AnyOther Name Is Just as Sweet. Relevantcash flows are also  known as:- Marginal   cash flows. In...
Project Cash Flows:Yes and No. YES:-   these are relevant cash flows - Incremental future sales revenue. Incremental fu...
Project Cash Flows:Yes and No.   NO:- these are not relevant cash flows - Changed future depreciation. Reallocated over...
Cash Flows and Depreciation:Always A Problem. Depreciation   is NOT a cash flow.Depreciation  is simply the accountingam...
Other Cash Flow Issues. Tax payable: if the project changes tax liabilities, those changed taxes are a flow of the projec...
Other Cash Flow Issues.    In property investment, ‘property’ cash    flows may be distinguished from    ‘equity’ cash fl...
Using Cash Flows All relevant project cash flows are setout in a table. The cash flow table usually readsacross in End O...
Project Cash Flows: SummaryOnly future, incremental, cash flowsare Relevant. Relevant Cash Flows are enteredinto a yearl...
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Transcript of "1 project cash flow"

  1. 1. Chapter 2: Project CashFlowsThe definition, identification, andmeasurement of cash flowsrelevant to project evaluation. 1
  2. 2. Why Cash Flows? Cash flows, and not accounting estimates, are used in project analysis because:-1. They measure actual economic wealth.2. They occur at identifiable time points.3. They have identifiable directional flow.4. They are free of accountingdefinitional problems. 2
  3. 3. The Meaning of RELEVANTCash Flows.A relevant cash flow is one which will change as a direct result of the decision about a project. A relevant cash flow is one which will occur in the future. A cash flowincurred in the past is irrelevant. It issunk. A relevant cash flow is the difference in the firm’s cash flows with the project, and without the project. 3
  4. 4. Cash Flows: A Rose By AnyOther Name Is Just as Sweet. Relevantcash flows are also known as:- Marginal cash flows. Incremental cash flows. Changing cash flows. Project cash flows. 4
  5. 5. Project Cash Flows:Yes and No. YES:- these are relevant cash flows - Incremental future sales revenue. Incremental future production costs. Incremental initial outlay. Incremental future salvage value. Incremental working capital outlay. Incremental future taxes. 5
  6. 6. Project Cash Flows:Yes and No. NO:- these are not relevant cash flows - Changed future depreciation. Reallocated overhead costs. Adjusted future accounting profit. The cost of unused idle capacity. Outlays incurred in the past. 6
  7. 7. Cash Flows and Depreciation:Always A Problem. Depreciation is NOT a cash flow.Depreciation is simply the accountingamortization of an initial capital cost.Depreciation amounts are onlyaccounting journal entries. Depreciation is measured in project analysis only because it reduces taxes. 7
  8. 8. Other Cash Flow Issues. Tax payable: if the project changes tax liabilities, those changed taxes are a flow of the project. Investment allowance: if a taxingauthority offers this ‘extra depreciation’concession, then its tax savings areincluded. Financing flows: interest paid ondebt, and dividends paid on equity, areNOT cash flows of the project. 8
  9. 9. Other Cash Flow Issues. In property investment, ‘property’ cash flows may be distinguished from ‘equity’ cash flows. In project analysis, cash inflowsare timed as at the end of a year, andcapital outlays are timed as at thestart of a year. Forecast inflated cash flows must bediscounted at the nominal discountrate, not the real discount rate. 9
  10. 10. Using Cash Flows All relevant project cash flows are setout in a table. The cash flow table usually readsacross in End Of Years, starting at EOY 0(now) and ending at the project’s lastyear.The cash flow table usually reads downin cash flow elements, resulting in a NetAnnual Cash Flow. This flow will have apositive or negative sign. 10
  11. 11. Project Cash Flows: SummaryOnly future, incremental, cash flowsare Relevant. Relevant Cash Flows are enteredinto a yearly cash flow table. Net Annual Cash Flows arediscounted to give the project’s NetPresent Value. 11
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