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  • 1)They are STRATEGIC in Nature and not TACTICAL as in the case of Current assets.(2)May be a total departure from the existing activity(3)
  • 1)They are STRATEGIC in Nature and not TACTICAL as in the case of Current assets.(2)May be a total departure from the existing activity(3)
  • 1)They are STRATEGIC in Nature and not TACTICAL as in the case of Current assets.(2)May be a total departure from the existing activity(3)
  • 1)They are STRATEGIC in Nature and not TACTICAL as in the case of Current assets.(2)May be a total departure from the existing activity(3)
  • 1)They are STRATEGIC in Nature and not TACTICAL as in the case of Current assets.(2)May be a total departure from the existing activity(3)
  • 1)They are STRATEGIC in Nature and not TACTICAL as in the case of Current assets.(2)May be a total departure from the existing activity(3)
  • 1)They are STRATEGIC in Nature and not TACTICAL as in the case of Current assets.(2)May be a total departure from the existing activity(3)
  • Example for Indirect ex-A co allocates OH on the basis of Floor space. Assume it wants to replace by a new one, and the new one will occupy less space then there is no increase in the expenses and has no effect on cash flows But if t.he extra space generates cash income such cash inflow should be factored.
  • 1)They are STRATEGIC in Nature and not TACTICAL as in the case of Current assets.(2)May be a total departure from the existing activity(3)
  • 1)They are STRATEGIC in Nature and not TACTICAL as in the case of Current assets.(2)May be a total departure from the existing activity(3)
  • 1)They are STRATEGIC in Nature and not TACTICAL as in the case of Current assets.(2)May be a total departure from the existing activity(3)
  • 1)They are STRATEGIC in Nature and not TACTICAL as in the case of Current assets.(2)May be a total departure from the existing activity(3)
  • 1)They are STRATEGIC in Nature and not TACTICAL as in the case of Current assets.(2)May be a total departure from the existing activity(3)
  • 1)They are STRATEGIC in Nature and not TACTICAL as in the case of Current assets.(2)May be a total departure from the existing activity(3)
  • 1)They are STRATEGIC in Nature and not TACTICAL as in the case of Current assets.(2)May be a total departure from the existing activity(3)
  • 1)They are STRATEGIC in Nature and not TACTICAL as in the case of Current assets.(2)May be a total departure from the existing activity(3)
  • 1)They are STRATEGIC in Nature and not TACTICAL as in the case of Current assets.(2)May be a total departure from the existing activity(3)
  • 1)They are STRATEGIC in Nature and not TACTICAL as in the case of Current assets.(2)May be a total departure from the existing activity(3)
  • 1)They are STRATEGIC in Nature and not TACTICAL as in the case of Current assets.(2)May be a total departure from the existing activity(3)
  • 1)They are STRATEGIC in Nature and not TACTICAL as in the case of Current assets.(2)May be a total departure from the existing activity(3)
  • Transcript

    • 1. 11ESTIMATION OF CASH FLOWSESTIMATION OF CASH FLOWSBy CA N.VenkatakrishnanBy CA N.Venkatakrishnan@@MVITMVIT1212THTHMAY 2011MAY 2011
    • 2. 22ESTIMATION OF CASH FLOWSESTIMATION OF CASH FLOWSOVERVIEW OF CAPITALOVERVIEW OF CAPITALBUDGETING ANDBUDGETING ANDEXPENDITUREEXPENDITURE ;;What is Capital Budgeting;What is Capital Budgeting; The process of identifying, evaluating andThe process of identifying, evaluating andselecting investments whose returns (cashselecting investments whose returns (cashflows) are expected to extend beyond oneflows) are expected to extend beyond oneyear ie Long term Investmentsyear ie Long term Investments
    • 3. 33ESTIMATION OF CASH FLOWSESTIMATION OF CASH FLOWSCAPITAL EXPENDITURE VS REVENUE EXPENDITURECAPITAL EXPENDITURE VS REVENUE EXPENDITURECapital ( CAPEX)Deferred revenue ( CAPEX)Revenue ( OPEX)
    • 4. 44ESTIMATION OF CASH FLOWSESTIMATION OF CASH FLOWSCAPITAL EXPENDITURECAPITAL EXPENDITURE ;;Purchase of capital equipmentPurchase of capital equipmentFurniture and FixturesFurniture and FixturesComputersComputersCommunication EquipmentCommunication EquipmentLand and BuildingsLand and BuildingsElectrical InstallationElectrical InstallationOffice EquipmentOffice EquipmentMajor repairs to any Asset which would enhance the life of thatMajor repairs to any Asset which would enhance the life of thatparticular Asset.particular Asset.
    • 5. 55ESTIMATION OF CASH FLOWSESTIMATION OF CASH FLOWSREVENUE EXPENDITUREREVENUE EXPENDITURE ;;Manufacturing costsManufacturing costsSalary, Bonus Gratuity etc-Employee costsSalary, Bonus Gratuity etc-Employee costsRentRentElectricityElectricityInterestInterestCommunication ExpensesCommunication ExpensesAdvertisementAdvertisementMarketing ExpensesMarketing Expenses
    • 6. 66ESTIMATION OF CASH FLOWSESTIMATION OF CASH FLOWSIMPORTANCE OF CASH FLOWS /CAPITALIMPORTANCE OF CASH FLOWS /CAPITALBUDEGETING DECISIONS;BUDEGETING DECISIONS;1)Affect the profitability of the company –Earning Assets of the1)Affect the profitability of the company –Earning Assets of thecompany.company.2)Will have a long term effect over the company2)Will have a long term effect over the company3)Not easily reversible without much Financial loss.3)Not easily reversible without much Financial loss.4)Involves huge costs and scarce resources4)Involves huge costs and scarce resourcesDIFFICULTIES IN CAPITAL EXPENDITURE DECISIONS;DIFFICULTIES IN CAPITAL EXPENDITURE DECISIONS;1)Relate to uncertain future Period involving various risk factors.1)Relate to uncertain future Period involving various risk factors.2)Costs and revenue accrue at different time periods.2)Costs and revenue accrue at different time periods.
    • 7. 77ESTIMATION OF CASH FLOWSESTIMATION OF CASH FLOWSCLASSIFICATION OF INVESTMENT PROJECTCLASSIFICATION OF INVESTMENT PROJECTPROPOSALS;PROPOSALS;11. New products or expansion. New products or expansion of existing productsof existing products2. Replacement2. Replacement of existing equipment or buildingsof existing equipment or buildings3. Infrastructure Projects3. Infrastructure Projects4. Research and development4. Research and development5. Exploration5. Exploration6. Mandatory Requirements (e.g., safety or pollution related)6. Mandatory Requirements (e.g., safety or pollution related)7. Others-welfare related like Townships etc.7. Others-welfare related like Townships etc.All these could be Independent or Mutually Exclusive.All these could be Independent or Mutually Exclusive.
    • 8. 88ESTIMATION OF CASH FLOWSESTIMATION OF CASH FLOWSEXECUTIVES/PROFESSIONALS INVOLVED IN CAPITALEXECUTIVES/PROFESSIONALS INVOLVED IN CAPITALBUDEGETINGBUDEGETING;;1. Engineering Teams-for outlays1. Engineering Teams-for outlays2.2. Plant Managers- for giving their inputsPlant Managers- for giving their inputs3. Production Team of Engineers-for operational costs3. Production Team of Engineers-for operational costs4.4. Marketing Team.– for estimationMarketing Team.– for estimation5.5. Finance Team- For working out the Financial dataFinance Team- For working out the Financial data6 Capital Expenditures Committee6 Capital Expenditures Committee7. President7. President8. Board of Directors8. Board of Directors
    • 9. 99ESTIMATION OF CASH FLOWSESTIMATION OF CASH FLOWSCAPITAL BUDGETING AND ESTIMATING CASH FLOWSCAPITAL BUDGETING AND ESTIMATING CASH FLOWS;;THE CAPITAL BUDGETING PROCESS;THE CAPITAL BUDGETING PROCESS;Generate investment proposals consistent with the firm’s strategicGenerate investment proposals consistent with the firm’s strategicobjectives.objectives.Estimate after-tax incremental operating cash flows for the investmentEstimate after-tax incremental operating cash flows for the investmentprojects.projects.Evaluate project incremental cash flowsEvaluate project incremental cash flowsSelect projects based on a value-maximizing acceptance criterion.Select projects based on a value-maximizing acceptance criterion.Reevaluate implemented investment projects continually and performReevaluate implemented investment projects continually and performpost audits for completed projectspost audits for completed projects
    • 10. 10ESTIMATION OF CASH FLOWSESTIMATION OF CASH FLOWSDIFFICULTIES IN ESTIMATION;DIFFICULTIES IN ESTIMATION; Inaccurate data can distort the cash flow projections andInaccurate data can distort the cash flow projections andeventually the conclusions may prove wrong.eventually the conclusions may prove wrong. Future cannot be predicted with certainty.Future cannot be predicted with certainty. The company has to rely on a lot of external DataThe company has to rely on a lot of external Dataespecially for new projects.especially for new projects. Accurate projections are important because the companyAccurate projections are important because the companymay accept an unviable proposal or reject a good proposal.may accept an unviable proposal or reject a good proposal.
    • 11. 11ESTIMATION OF CASH FLOWSESTIMATION OF CASH FLOWSPRINCIPLES OF CASH FLOWPRINCIPLES OF CASH FLOW;;To arrange proper Financing for a project, it is imperative to ascertain theTo arrange proper Financing for a project, it is imperative to ascertain thecorrect profitability of the Project. The project cash flows consider almostcorrect profitability of the Project. The project cash flows consider almostevery kind of inflows of cashevery kind of inflows of cash ..1)Consistency principle1)Consistency principle;; cash flows should be consistent as to the discount rates and estimatingcash flows should be consistent as to the discount rates and estimatingthe cash flows. If distorted, then the purpose will be defeated.the cash flows. If distorted, then the purpose will be defeated. Investors’ and Inflation factors have to be factored in the cash flowInvestors’ and Inflation factors have to be factored in the cash flow2)Post Tax principle2)Post Tax principle;; Cash flows have to factor in the taxes applicable. Whether it is theCash flows have to factor in the taxes applicable. Whether it is thecompany’s average tax or the projects marginal tax would depend on thecompany’s average tax or the projects marginal tax would depend on thesituation of the company. eg Previous existing Losses.situation of the company. eg Previous existing Losses. Non cash charges do affect cash flows.Non cash charges do affect cash flows.
    • 12. 12ESTIMATION OF CASH FLOWSESTIMATION OF CASH FLOWSPRINCIPLES OF CASH FLOW;PRINCIPLES OF CASH FLOW;3)Incremental principle;3)Incremental principle; According to this principle, only differences due to the decision needsAccording to this principle, only differences due to the decision needsto be considered. Other factors may be important but not to theto be considered. Other factors may be important but not to thedecision at hand.decision at hand. Incidental Effects: Any kind of project taken by a company remainsIncidental Effects: Any kind of project taken by a company remainsrelated to the other activities of the firm. Because of this, a particularrelated to the other activities of the firm. Because of this, a particularproject influences all the other activities carried out, either negatively orproject influences all the other activities carried out, either negatively orpositively. It can increase the profits for the firm or it may cause losses.positively. It can increase the profits for the firm or it may cause losses.4)Separation principle;4)Separation principle; This principle recognizes the fact that any projectThis principle recognizes the fact that any projectcash flow estimation has two sides viz Investment and Financing.cash flow estimation has two sides viz Investment and Financing.
    • 13. 1313ESTIMATION OF CASH FLOWSESTIMATION OF CASH FLOWSDATA REQUIRED-IDENTIFYING RELEVANT CASH FLOWSDATA REQUIRED-IDENTIFYING RELEVANT CASH FLOWS1)CASH FLOW VS ACCOUNTING PROFIT1)CASH FLOW VS ACCOUNTING PROFIT ;;Cash Flow method is a better method of measuring Economic Viability;Cash Flow method is a better method of measuring Economic Viability;Accounting Profits/losses include Non Cash Expenses and will not give anAccounting Profits/losses include Non Cash Expenses and will not give anaccurate picture of the EV of the Investment proposal. Cash Flows willaccurate picture of the EV of the Investment proposal. Cash Flows willdescribe the Cash Transactions the company will experience once thedescribe the Cash Transactions the company will experience once theProject is accepted.Project is accepted.There are Accounting ambiguities in determining net profits underThere are Accounting ambiguities in determining net profits underAccounting profits eg Valuation of Inventories, ,allocation of costs, methodsAccounting profits eg Valuation of Inventories, ,allocation of costs, methodsof depreciation, provisions etc. Cash Flow method provides a near perfectof depreciation, provisions etc. Cash Flow method provides a near perfectpicture of the EV of the Investment proposal.picture of the EV of the Investment proposal.Cash Flow method recognizes the Time value of money where asCash Flow method recognizes the Time value of money where asAccounting profits are more historical and on accrual basis.Accounting profits are more historical and on accrual basis.
    • 14. 1414ESTIMATION OF CASH FLOWSESTIMATION OF CASH FLOWSDifference between Accounting and cash Flow approach; In rupeesDifference between Accounting and cash Flow approach; In rupeesParticularsParticularsRevenues-sales(1)Revenues-sales(1)Less ;Cost of sales(2)Less ;Cost of sales(2)MaterialsMaterialsLaborLaborother expensesother expensesDepreciationDepreciationTotal costTotal costEarnings/Cash Flow before Tax(1-2)Earnings/Cash Flow before Tax(1-2)Taxes say 30%Taxes say 30%Net Earnings/Cash flow after TaxNet Earnings/Cash flow after TaxAccountingAccountingapproachapproach50,00050,000200002000060006000400040001000010000400004000010000100003000300070007000Cash FlowCash Flowapproachapproach50,00050,00020000200006000600040004000------------------30000300002000020000600060001400014000
    • 15. 15ESTIMATION OF CASH FLOWSESTIMATION OF CASH FLOWS2)INCREMENTAL CASH FLOWS;2)INCREMENTAL CASH FLOWS; These are cash flowsThese are cash flows WITHWITH the Proposed Project MINUS thethe Proposed Project MINUS thecompany’s cash flowcompany’s cash flow WITHOUTWITHOUT the Project.the Project. Cash Flows (and only those cash flows) which are directly attributableCash Flows (and only those cash flows) which are directly attributableto the Investment are considered.to the Investment are considered. Eg Fixed Overhead costs which remain the same whether the proposalEg Fixed Overhead costs which remain the same whether the proposalis accepted or rejected are not considered.is accepted or rejected are not considered. If there is an increase in the FO costs due to the new proposal theyIf there is an increase in the FO costs due to the new proposal theymay be considered.may be considered.
    • 16. 1616ESTIMATION OF CASH FLOWSESTIMATION OF CASH FLOWSRelevant and Irrelevant cash outflows;Relevant and Irrelevant cash outflows;Relevant for cash outflows;Relevant for cash outflows; Cost of the InvestmentCost of the InvestmentVariable costs-Material and LaborVariable costs-Material and LaborAdditional Fixed overheadsAdditional Fixed overheadsTaxesTaxesEffects of InflationEffects of InflationOpportunity costsOpportunity costsIrrelevant for cash outflowsIrrelevant for cash outflowsFixed OverheadsFixed OverheadsSunk costs.Sunk costs.
    • 17. 17ESTIMATION OF CASH FLOWSESTIMATION OF CASH FLOWSINGREDIENTS OF CASH FLOW STREAMS;INGREDIENTS OF CASH FLOW STREAMS;Tax effect-Tax effect->Cash flows are to be considered net of taxes.>Cash flows are to be considered net of taxes.> If the company is loss making any profit earned can be set off> If the company is loss making any profit earned can be set offagainst the losses incurred earlier.against the losses incurred earlier.Effect on Other ProjectsEffect on Other Projects;;>May have an effect on the proposed project. eg, an existing product>May have an effect on the proposed project. eg, an existing productmay suffer due to the new project. This has to be factored. The newmay suffer due to the new project. This has to be factored. The newproject evaluation cannot be isolated and taken as it is.project evaluation cannot be isolated and taken as it is.>Any reduction in cash flow of other projects will have a bearing on the>Any reduction in cash flow of other projects will have a bearing on theIncremental cash flow of the proposed project.Incremental cash flow of the proposed project.Effect of Indirect ExpensesEffect of Indirect Expenses;;>depends on whether the amount of overheads will change as a result of>depends on whether the amount of overheads will change as a result ofthe of the decision. If yes, then it should be factored. If there is going tothe of the decision. If yes, then it should be factored. If there is going tono change, then they are not relevant.no change, then they are not relevant.
    • 18. 18ESTIMATION OF CASH FLOWSESTIMATION OF CASH FLOWSEffect of Depreciation;Effect of Depreciation; Is a non cash expenditure which does not have a cash outflow but has toIs a non cash expenditure which does not have a cash outflow but has todeducted while working out the tax on the net cash flows and evaluationdeducted while working out the tax on the net cash flows and evaluationthere after.there after. Companies Act prescribes various depreciation ratesCompanies Act prescribes various depreciation rates Normally two methods are used-Straight line method or WDV method.Normally two methods are used-Straight line method or WDV method. Income tax Act provides rates which are also followed by manyIncome tax Act provides rates which are also followed by manycompanies in their books.companies in their books.Effect of working capital;Effect of working capital; Constitutes another important ingredient which directly affects theConstitutes another important ingredient which directly affects theproposal. It is a cash out flow in the year there is an increase in the netproposal. It is a cash out flow in the year there is an increase in the netWC requirement. It could be from t0 to tn.WC requirement. It could be from t0 to tn.
    • 19. 1919ESTIMATION OF CASH FLOWSESTIMATION OF CASH FLOWSCOMPONENTS OF CASH FLOW;COMPONENTS OF CASH FLOW;1)INITIAL INVESTMENT OR OUTLAY/OUTFLOW-1)INITIAL INVESTMENT OR OUTLAY/OUTFLOW-a)a) Purchase price of “new” assetsPurchase price of “new” assetsb) +Capitalized expenditure-Freight , Insurance, Transportation, Trainingb) +Capitalized expenditure-Freight , Insurance, Transportation, Trainingof Manpower to use the machine,CD etcof Manpower to use the machine,CD etcc)c) Opportunity costs incurred.. eg own land/house used for the project.Opportunity costs incurred.. eg own land/house used for the project.d)+ (-)Increase (decrease) =Net Working Capital.d)+ (-)Increase (decrease) =Net Working Capital.e)-e)- Net proceeds from sale of “old” Assets ,if replacementNet proceeds from sale of “old” Assets ,if replacementf)f) + (-)+ (-) Taxes (savings) due to the sale of ‘old ‘machines/assetsTaxes (savings) due to the sale of ‘old ‘machines/assetsf)f) == Initial cashInitial cash outflowoutflow
    • 20. 20ESTIMATION OF CASH FLOWSESTIMATION OF CASH FLOWSAn old machine is to be replaced. It was bought 4 years ago for rs 120,000An old machine is to be replaced. It was bought 4 years ago for rs 120,000and now sold as salvage for Rs 10000.The accumulated depreciationand now sold as salvage for Rs 10000.The accumulated depreciationamounts to Rs 112000.amounts to Rs 112000.The cost of the new machine is Rs 200,000.The installation costs amountThe cost of the new machine is Rs 200,000.The installation costs amountto Rs 4000 and training costs Rs 5000.The increase in net workingto Rs 4000 and training costs Rs 5000.The increase in net workingcapital amounts to Rs 3000.Tax rate is 30%.capital amounts to Rs 3000.Tax rate is 30%.Find out the initial investment ;Find out the initial investment ;Cost of machine- 200,000Cost of machine- 200,000Installation cost- +4000Installation cost- +4000Training costs- +5000Training costs- +5000Increase in WC- +3000Increase in WC- +3000Salvage value- -10000Salvage value- -10000Tax on CG@30-Tax on CG@30- - 600- 600RsRs 201,400201,400
    • 21. 2121ESTIMATION OF CASH FLOWSESTIMATION OF CASH FLOWS2)2) OPERATING CASH FLOWS/NET ANNUAL CASHOPERATING CASH FLOWS/NET ANNUAL CASHFLOWSFLOWS;;Represents cash inflows on account of sales/revenue generation minusRepresents cash inflows on account of sales/revenue generation minuscash out flow on account of expenses.cash out flow on account of expenses.Every Investment is expected to generate future benefits in the form ofEvery Investment is expected to generate future benefits in the form ofcash flows from operations.cash flows from operations.Represents annual cash flows generated from the investments.Represents annual cash flows generated from the investments.Represent net flows before depreciation and after taxes.Represent net flows before depreciation and after taxes.
    • 22. 2222ESTIMATION OF CASH FLOWSESTIMATION OF CASH FLOWS3)TERMINAL CASH FLOWS3)TERMINAL CASH FLOWS;;The cash inflow to the company during the terminal year (lastThe cash inflow to the company during the terminal year (lastyear) is called Terminal cash flow.year) is called Terminal cash flow.Represents some value in the asset when the asset isRepresents some value in the asset when the asset isterminated/project is completed.terminated/project is completed.When Replacement decision is taken to replace old asset withWhen Replacement decision is taken to replace old asset withnew asset, the sale value of the old asset is the terminal cashnew asset, the sale value of the old asset is the terminal cashflow of the asset replaced. (eg True value exchange of Maruthiflow of the asset replaced. (eg True value exchange of Maruthicar).car).Due to termination of the Asset, there may be release of someDue to termination of the Asset, there may be release of someNet working capital tied up in the initial year which should alsoNet working capital tied up in the initial year which should alsobe added to the salvage of the asset in the terminal cash flows.be added to the salvage of the asset in the terminal cash flows.
    • 23. 2323ESTIMATION OF CASH FLOWSESTIMATION OF CASH FLOWSDetermination of InflowsDetermination of InflowsParticularsParticularsSalesSalesLess Operating costsLess Operating costsCash Inflows before Taxes (CFBT)Cash Inflows before Taxes (CFBT)Less DepnLess DepnTaxable IncomeTaxable IncomeLess TaxLess TaxEarnings after TaxEarnings after TaxPlus DepreciationPlus DepreciationCash inflows after Taxes ( CFAT)Cash inflows after Taxes ( CFAT)PLUS salvage value (yn)PLUS salvage value (yn)PLUS Recovery of working capitalPLUS Recovery of working capitalY1Y1 y2y2 y3y3 y4y4 ynyn
    • 24. 2424ESTIMATION OF CASH FLOWSESTIMATION OF CASH FLOWSInvestments, costs and Revenues( in rs 000)Investments, costs and Revenues( in rs 000)RevenuesRevenuesCosts -300Costs -300Undiscounted cash flow -300Undiscounted cash flow -300Cum cash flow -300Cum cash flow -300NPV=400NPV=400Pay back period=2.78 yearsPay back period=2.78 yearsY1Y110010020208080-220-220Y2Y210010020208080-140-140Y3Y320020020201801804040Y4Y42002002020180180220220Y5Y52002002020180180400400
    • 25. 2525ESTIMATION OF CASH FLOWSESTIMATION OF CASH FLOWSComputation of cash flowsComputation of cash flowsYearYearCash flows -300Cash flows -300DCF(@10%)DCF(@10%)DCF -300DCF -300Cum DCFCum DCFNPV=208.7NPV=208.7Pay back period=3.21 yearsPay back period=3.21 yearsY1Y180800.9090.90972.7272.72-227.78-227.78Y2Y280800.8260.82666.0866.08-161.2-161.2Y3Y31801800.7510.751135.18135.18-26.02-26.02Y4Y41801800.6830.683122.94122.9496.9296.92Y5Y51801800.6210.621111.78111.78208.70208.70
    • 26. 2626ESTIMATION OF CASH FLOWSESTIMATION OF CASH FLOWSComputation of cash flows-in 000RsComputation of cash flows-in 000RsYearYear 00Cash Outflow -300Cash Outflow -300Gross IncomeGross IncomeDepreciation(300000/5)Depreciation(300000/5)Taxable IncomeTaxable IncomeTax@30%Tax@30%CFATCFATy1y1808060602020667474y2y2808060602020667474y3y318018060601201203636144144y4y418018060601201203636144144y5y518018060601201203636144144
    • 27. 2727ESTIMATION OF CASH FLOWSESTIMATION OF CASH FLOWSComputation of cash flowsComputation of cash flowsYearYear 00Cash flows -300Cash flows -300CFATCFATDCF(@10%)DCF(@10%)DCF -300DCF -300Cum DCFCum DCFNPV=124.3NPV=124.3Pay back period=3.65 yearsPay back period=3.65 yearsY1Y1808074740.9090.90967.2767.27-232.73-232.73Y2Y2808074740.8260.82661.1261.12-171.61-171.61Y3Y31801801441440.7510.751108.14108.14-63.47-63.47Y4Y41801801441440.6830.68398.3598.3534.8834.88Y5Y51801801441440.6210.62189.4289.42124.30124.30
    • 28. 2828ESTIMATION OF CASH FLOWSESTIMATION OF CASH FLOWSBEFORE TAX AFTER TAXBEFORE TAX AFTER TAXNPV (RsNPV (Rs000)000)400400208.7208.785.585.52.22.2PAY BACKPAY BACKPERIODPERIOD2.782.783.213.213.853.854.954.95Rate(%)Rate(%)00101020203030PAY BACKPAY BACKPERIODPERIOD3.063.063.653.654.64.6>5>5NPV( RsNPV( Rs000)000)280280124.31124.3123,6723,67-44.63-44.63
    • 29. 2929ESTIMATION OF CASH FLOWSESTIMATION OF CASH FLOWSIMPACT OF IMPROPER CASH FLOW ESTIMATION;IMPACT OF IMPROPER CASH FLOW ESTIMATION;Reasons;Reasons;Improper assessment of the project.Improper assessment of the project.Inadequate Data.Inadequate Data.Results;Results;Affects investment evaluation leading to wrong decision making.Affects investment evaluation leading to wrong decision making.Affects the profitability of the project and the company.Affects the profitability of the project and the company.Affects the financial position of the company leading to cash crunchAffects the financial position of the company leading to cash crunchsituationssituationsAffects the existing business lines as the “new” project starts eatingAffects the existing business lines as the “new” project starts eatinginto the resources of the existing business.into the resources of the existing business.Affects the reputation of the company.Affects the reputation of the company.
    • 30. 3030ESTIMATION OF CASH FLOWSESTIMATION OF CASH FLOWSCase study;Case study;““A” company is into retail business for the last 10 years with an averageA” company is into retail business for the last 10 years with an averageturnover of Rs 50 crores and an average net profit of Rs 2.5 croresturnover of Rs 50 crores and an average net profit of Rs 2.5 croresduring the last 5 years. As the margins are low in retail business due toduring the last 5 years. As the margins are low in retail business due tosevere competition, the average net profits of the retail Industry issevere competition, the average net profits of the retail Industry isaround 5% and A company was within the Industry standards vis a visaround 5% and A company was within the Industry standards vis a visthe average net profit.the average net profit.The Management wanted to expand and it took on lease a property inThe Management wanted to expand and it took on lease a property inthe CBD area and modified it into an ultra modern show room .The costthe CBD area and modified it into an ultra modern show room .The costof the expansion was Rs 50 crores and it had to borrow the entireof the expansion was Rs 50 crores and it had to borrow the entireamount as term loan from the bank at an interest rate of 12 %peramount as term loan from the bank at an interest rate of 12 %perannum repayable in 10 years. Annual property lease cost is Rs 2annum repayable in 10 years. Annual property lease cost is Rs 2crores.crores.The new showroom would generate an average turnover of Rs 30The new showroom would generate an average turnover of Rs 30crores per annum in the first 5 years with an average net profit of 1.5crores per annum in the first 5 years with an average net profit of 1.5crores @5percent. The gross profit is 30 percentcrores @5percent. The gross profit is 30 percentHas “A “company taken a good decision? Make suitable assumptionsHas “A “company taken a good decision? Make suitable assumptionsand advise “A “company the position ,pointing out where and in whichand advise “A “company the position ,pointing out where and in whichareas of cash flow estimation they have gone wrong.areas of cash flow estimation they have gone wrong.
    • 31. 3131ESTIMATION OF CASH FLOWSESTIMATION OF CASH FLOWSThank youThank you