Relay based controller

1. ESTIMATION OF CASH FLOWS
UNDER THE GUIDANCE OF
ARUBA RAJAN
Presented by
Sachin C S
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2. • Cash flow is an accounting termthat refers to the amounts of cash being receivedand spent by a
businessduringadefinedperiodof time.
• A cash flow enables you to create a short-term forecast that enables you to
determine how you are going to get money for the project and how you are going
to pay for your expenses.
• Cash inflows usually arise from financing, operations and investing. while cash
outflows mainly result from expenses.
• Estimating the cash flow of a project is necessary and one of the most challenging
parts of capital budgeting.
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Introduction

3. • Initial investment: Initial investment is the after-tax cash outlay on capital
expenditure andnet working capitalwhen the project is set up.
• Operating cash inflows: Operating cash inflows are the after-tax cash inflows
resulting from the operations of the project during its economic life.
• Terminal cash inflow: Terminal cash inflow is the after-tax cash flow resulting from
the liquidationof the project atthe end of its economic life.
Elements of The Cash Flow Stream
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4. Time horizon for cash flow analysis
1. Physical life of the plant: The period during which the plant remains
in a physically usable condition.
2. Technological life of the plant: The period of time for which the
present plant would not be rendered obsolete by a new plant.
3. Product market life of the plant: The period for which the product of
plant enjoys a reasonably satisfactory market.
4. Investment planning horizon of the firm: The period for which a
firm wishes to look ahead for purposes of investment analysis.
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5. Principles of cash flow estimation
Incrementalprinciple
Separationprinciple
Post-taxprinciple
Consistencyprinciple
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6. Incremental principle
In estimating the incremental cash flows of a project, the following
guidelines must be considered:
• Incidental effects
• Ignore sunk costs: Sunk costs represent an expenditure done by the firm in
the past.
• Opportunity costs
• Overhead costs: costs which are only indirectly related to product.
• Estimate working capital properly:Proper estimation is essential and
should be considered at the time when the budget for the project’s profit
potential is prepared.
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7. Post-tax principle
• Cash flow should be measured on an after tax basis.
• Bring out the project cash flow with accuracy.
Issues related to post-tax principle
• Tax rate
• Handling the losses
• Non cash charges
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8. Consistency principle
• Cash flows should be consistent as to the discount rates and estimating the cash flows.
If distorted, then the purpose will be defeated.
• Investors’ and Inflation factors have to be factored in the cash flow
• Cash flow to all investors = PBIT(1-tax rate) + Depreciation and non cash charges -
capital expenditure - change in working capital.
• Inflation: The first option is to merge a likely inflation in the project cash flow
estimates. After this, a nominal discount rate is applied on the amount.
Another way of handling the inflation factor is to calculate the project cash flows of the
future in real terms with real discount rates.
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9. Separation principle
There aretwo sides ofa project:
Investment(or asset) side
Financingside
The cashflows associatedwiththesesides should be separated.
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10. Expansion Projects and Replacement Projects Cash Flows
• Expansion Projects: These are projects where the firm seeks to profitably
increase sales of current products or introduce new products into the market.
• Replacement Projects: These are projects where the firm must either: replace
worn out equipment or invest in new equipment that is expected to lower current
production costs and/or increase current sales.
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11. Calculating Cash Flows for Expansion Projects
1. Calculate the initial investment expenditure
Initial Investment = Fixed Capital Investment + Working Capital Investment
2. Calculate operating cash flows (OCF) for project’s life
OCF = EBIT (1 – tax rate) + Deprecation
3. Calculate Terminal Year Non-Operating Cash Flows (TNOCF)
TNOCF = Sale of Fixed Capital + Working Capital Investment Recovery –
((Sale of Fixed Capital – Book Value of Fixed Capital) * (tax rate))
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12. 4. Calculate a Net Present Value (NPV)
• The NPV calculation typically applies the firm’s marginal weighted
average cost of capital (WACC) as the discount rate.
• A project with a negative NPV should be rejected by the firm.
Contd…..
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13. Calculating Cash Flows for Replacement Projects
1. Calculate the initial investment expenditure
Initial Investment = Fixed Capital Investment + Working Capital Investment – Sale of Old
Equipment + ((Sale of Old Equip. – Book Value of Old Equip.)*(tax rate))
2. Calculate Operating Cash Flows
OCF = Operating cash inflows from the new asset - Operating cash inflows from the old asset
3. Calculate Terminal Cash Flows (TCF):
Terminal cash flow = (After tax salvage value of the new asset + Recovery of net working
capital associated with the new asset) – (after tax salvage value of the old asset+ Recovery of
net working capital associated with the old asset)
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14. REFERENCES
• Financial Management – Prasanna Chandra, 7e, 2013, TMH Publications
• M.Y. Khan & P.K. Jain – Basic Financial Management (TMH), 3/e, 2014
• Financial Management – by Shashi K. Gupta, R. K. Sharma and Neeti
Gupta, 2nd edition, Kalyani publications
• www.investopedia.com
• www.google.com
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