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ESTIMATION OF CASH FLOWS By CA N.Venkatakrishnan @ MVIT 12 TH  MAY 2011
ESTIMATION OF CASH FLOWS ,[object Object],[object Object],[object Object]
ESTIMATION OF CASH FLOWS CAPITAL  EXPENDITURE  VS  REVENUE EXPENDITURE Capital ( CAPEX) Deferred revenue ( CAPEX)  Revenue ( OPEX)
ESTIMATION OF CASH FLOWS ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
ESTIMATION OF CASH FLOWS ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
ESTIMATION OF CASH FLOWS IMPORTANCE OF CASH FLOWS /CAPITAL BUDEGETING DECISIONS; 1)Affect the profitability of the company –Earning Assets of the company. 2)Will have a long term effect  over the company 3)Not easily reversible without much Financial loss. 4)Involves huge costs and scarce resources DIFFICULTIES IN CAPITAL EXPENDITURE DECISIONS; 1)Relate to uncertain future Period involving various risk factors. 2)Costs  and revenue accrue at different time periods.
ESTIMATION OF CASH FLOWS CLASSIFICATION OF INVESTMENT PROJECT PROPOSALS; 1 .  New products or expansion  of existing products 2.  Replacement  of existing equipment or buildings 3.  Infrastructure Projects 4.  Research and development 5.  Exploration 6.  Mandatory Requirements (e.g., safety or pollution related) 7.  Others-welfare related like Townships etc. All these could be Independent  or  Mutually Exclusive.
ESTIMATION OF CASH FLOWS ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
ESTIMATION OF CASH FLOWS ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
ESTIMATION OF CASH FLOWS ,[object Object],[object Object],[object Object],[object Object],[object Object]
ESTIMATION OF CASH FLOWS ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
ESTIMATION OF CASH FLOWS ,[object Object],[object Object],[object Object],[object Object],[object Object]
ESTIMATION OF CASH FLOWS ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
ESTIMATION OF CASH FLOWS Difference between Accounting and cash Flow approach;  In rupees Cash Flow approach 50,000 20000 6000 4000 --------- 30000 20000 6000 14000 Accounting approach  50,000 20000 6000 4000 10000 40000 10000 3000 7000 Particulars Revenues-sales(1) Less ;Cost of sales(2) Materials Labor other expenses Depreciation Total cost Earnings/Cash Flow before Tax(1-2) Taxes say 30% Net Earnings/Cash flow after Tax
ESTIMATION OF CASH FLOWS ,[object Object],[object Object],[object Object],[object Object],[object Object]
ESTIMATION OF CASH FLOWS ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
ESTIMATION OF CASH FLOWS ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
ESTIMATION OF CASH FLOWS ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
ESTIMATION OF CASH FLOWS ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
ESTIMATION OF CASH FLOWS ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
ESTIMATION OF CASH FLOWS ,[object Object],[object Object],[object Object],[object Object],[object Object]
ESTIMATION OF CASH FLOWS ,[object Object],[object Object],[object Object],[object Object],[object Object]
ESTIMATION OF CASH FLOWS Determination of Inflows yn y4 y3 y2 Y1  Particulars Sales Less Operating costs Cash Inflows before Taxes (CFBT) Less Depn Taxable Income Less Tax Earnings after Tax Plus Depreciation Cash inflows after Taxes ( CFAT) PLUS salvage value (yn) PLUS Recovery of working capital
ESTIMATION OF CASH FLOWS Investments, costs and Revenues( in rs 000) Y5 200 20 180 400 Y4 200 20 180 220 Y3 200 20 180 40 Y2 100 20 80 -140 Y1 100 20 80 -220 Revenues Costs  -300 Undiscounted cash flow  -300 Cum  cash flow  -300 NPV=400 Pay back period=2.78 years
ESTIMATION OF CASH FLOWS Computation of cash flows Y5 180 0.621 111.78208.70 Y4 180 0.683 122.94 96.92 Y3 180 0.751 135.18 -26.02 Y2 80 0.826 66.08 -161.2 Y1 80 0.909 72.72 -227.78 Year  Cash flows  -300 DCF(@10%)  DCF  -300 Cum DCF NPV=208.7 Pay back period=3.21 years
ESTIMATION OF CASH FLOWS Computation of cash flows-in 000Rs y5 180 60 120 36 144 y4 180 60 120 36 144 y3 180 60 120 36 144 y2 80 60 20 6 74 y1 80 60 20 6 74 Year  0 Cash Outflow  -300 Gross Income Depreciation(300000/5) Taxable Income Tax@30% CFAT
ESTIMATION OF CASH FLOWS Computation of cash flows Y5 180 144 0.621 89.42 124.30 Y4 180 144 0.683 98.35 34.88 Y3 180 144 0.751 108.14 -63.47 Y2 80 74 0.826 61.12 -171.61 Y1 80 74 0.909 67.27 -232.73 Year  0 Cash flows  -300 CFAT DCF(@10%)  DCF  -300 Cum DCF NPV=124.3 Pay back period=3.65 years
ESTIMATION OF CASH FLOWS BEFORE TAX  AFTER TAX NPV( Rs 000) 280 124.31 23,67 -44.63 PAY BACK PERIOD 3.06 3.65 4.6 >5 Rate(%) 0 10 20 30 PAY BACK PERIOD 2.78 3.21 3.85 4.95 NPV (Rs 000) 400 208.7 85.5 2.2
ESTIMATION OF CASH FLOWS ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
ESTIMATION OF CASH FLOWS Case study; “ A” company is into retail business for the last 10 years with an average turnover of Rs 50 crores and an average net profit of Rs 2.5 crores during the last 5 years. As the margins are low in retail business due to severe competition, the average net profits of the retail Industry is around 5% and A company was within the Industry standards vis a vis the average net profit. The Management wanted to expand and it took on lease  a property in the CBD area and modified it into an ultra modern show room .The cost of the expansion was Rs 50 crores and it had to borrow the entire amount  as term loan from the bank at an interest rate of 12 %per annum repayable in 10 years. Annual property lease  cost is Rs 2 crores. The new showroom would generate an average turnover of Rs 30 crores per annum in the first 5 years with an average net profit of 1.5 crores @5percent. The gross profit is 30 percent Has “A “company taken a good decision? Make  suitable assumptions and advise “A “company the position ,pointing out where and in  which areas of cash flow estimation they have gone wrong.
ESTIMATION OF CASH FLOWS Thank you

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Estimation of Cash Flow

  • 1. ESTIMATION OF CASH FLOWS By CA N.Venkatakrishnan @ MVIT 12 TH MAY 2011
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  • 3. ESTIMATION OF CASH FLOWS CAPITAL EXPENDITURE VS REVENUE EXPENDITURE Capital ( CAPEX) Deferred revenue ( CAPEX) Revenue ( OPEX)
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  • 6. ESTIMATION OF CASH FLOWS IMPORTANCE OF CASH FLOWS /CAPITAL BUDEGETING DECISIONS; 1)Affect the profitability of the company –Earning Assets of the company. 2)Will have a long term effect over the company 3)Not easily reversible without much Financial loss. 4)Involves huge costs and scarce resources DIFFICULTIES IN CAPITAL EXPENDITURE DECISIONS; 1)Relate to uncertain future Period involving various risk factors. 2)Costs and revenue accrue at different time periods.
  • 7. ESTIMATION OF CASH FLOWS CLASSIFICATION OF INVESTMENT PROJECT PROPOSALS; 1 . New products or expansion of existing products 2. Replacement of existing equipment or buildings 3. Infrastructure Projects 4. Research and development 5. Exploration 6. Mandatory Requirements (e.g., safety or pollution related) 7. Others-welfare related like Townships etc. All these could be Independent or Mutually Exclusive.
  • 8.
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  • 14. ESTIMATION OF CASH FLOWS Difference between Accounting and cash Flow approach; In rupees Cash Flow approach 50,000 20000 6000 4000 --------- 30000 20000 6000 14000 Accounting approach 50,000 20000 6000 4000 10000 40000 10000 3000 7000 Particulars Revenues-sales(1) Less ;Cost of sales(2) Materials Labor other expenses Depreciation Total cost Earnings/Cash Flow before Tax(1-2) Taxes say 30% Net Earnings/Cash flow after Tax
  • 15.
  • 16.
  • 17.
  • 18.
  • 19.
  • 20.
  • 21.
  • 22.
  • 23. ESTIMATION OF CASH FLOWS Determination of Inflows yn y4 y3 y2 Y1 Particulars Sales Less Operating costs Cash Inflows before Taxes (CFBT) Less Depn Taxable Income Less Tax Earnings after Tax Plus Depreciation Cash inflows after Taxes ( CFAT) PLUS salvage value (yn) PLUS Recovery of working capital
  • 24. ESTIMATION OF CASH FLOWS Investments, costs and Revenues( in rs 000) Y5 200 20 180 400 Y4 200 20 180 220 Y3 200 20 180 40 Y2 100 20 80 -140 Y1 100 20 80 -220 Revenues Costs -300 Undiscounted cash flow -300 Cum cash flow -300 NPV=400 Pay back period=2.78 years
  • 25. ESTIMATION OF CASH FLOWS Computation of cash flows Y5 180 0.621 111.78208.70 Y4 180 0.683 122.94 96.92 Y3 180 0.751 135.18 -26.02 Y2 80 0.826 66.08 -161.2 Y1 80 0.909 72.72 -227.78 Year Cash flows -300 DCF(@10%) DCF -300 Cum DCF NPV=208.7 Pay back period=3.21 years
  • 26. ESTIMATION OF CASH FLOWS Computation of cash flows-in 000Rs y5 180 60 120 36 144 y4 180 60 120 36 144 y3 180 60 120 36 144 y2 80 60 20 6 74 y1 80 60 20 6 74 Year 0 Cash Outflow -300 Gross Income Depreciation(300000/5) Taxable Income Tax@30% CFAT
  • 27. ESTIMATION OF CASH FLOWS Computation of cash flows Y5 180 144 0.621 89.42 124.30 Y4 180 144 0.683 98.35 34.88 Y3 180 144 0.751 108.14 -63.47 Y2 80 74 0.826 61.12 -171.61 Y1 80 74 0.909 67.27 -232.73 Year 0 Cash flows -300 CFAT DCF(@10%) DCF -300 Cum DCF NPV=124.3 Pay back period=3.65 years
  • 28. ESTIMATION OF CASH FLOWS BEFORE TAX AFTER TAX NPV( Rs 000) 280 124.31 23,67 -44.63 PAY BACK PERIOD 3.06 3.65 4.6 >5 Rate(%) 0 10 20 30 PAY BACK PERIOD 2.78 3.21 3.85 4.95 NPV (Rs 000) 400 208.7 85.5 2.2
  • 29.
  • 30. ESTIMATION OF CASH FLOWS Case study; “ A” company is into retail business for the last 10 years with an average turnover of Rs 50 crores and an average net profit of Rs 2.5 crores during the last 5 years. As the margins are low in retail business due to severe competition, the average net profits of the retail Industry is around 5% and A company was within the Industry standards vis a vis the average net profit. The Management wanted to expand and it took on lease a property in the CBD area and modified it into an ultra modern show room .The cost of the expansion was Rs 50 crores and it had to borrow the entire amount as term loan from the bank at an interest rate of 12 %per annum repayable in 10 years. Annual property lease cost is Rs 2 crores. The new showroom would generate an average turnover of Rs 30 crores per annum in the first 5 years with an average net profit of 1.5 crores @5percent. The gross profit is 30 percent Has “A “company taken a good decision? Make suitable assumptions and advise “A “company the position ,pointing out where and in which areas of cash flow estimation they have gone wrong.
  • 31. ESTIMATION OF CASH FLOWS Thank you

Editor's Notes

  1. 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)
  2. 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)
  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)
  4. 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)
  5. 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)
  6. 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)
  7. 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)
  8. 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.
  9. 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)
  10. 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)
  11. 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)
  12. 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)
  13. 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)
  14. 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)
  15. 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)
  16. 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)
  17. 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)
  18. 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)
  19. 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)
  20. 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)