Narain Notes

Cost – Benefit measurement

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Profit is not a theoretical superior basis of measurement Cash Flow is considered to be the superior basis of measurement

– Is not affected by the Accounting conventions – Objective and verifiable

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Cash Flow models can also be taken at different levels of analysis –

– Operating Free Cash Flow – Free Cash Flow to Equity

Narain

Cash Flows of the Project

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After – tax incremental operating cash flows

Only the cash flows which are incremental in nature and directly attributable to the project are relevant Net of tax effect – tax liability or tax shield Depreciation & Amortisation – non cash items but affects taxes Indirect overheads – ignore if not affected by the project Effect on other projects – consider with the projects flows Opportunity costs – consider with the project flows

Narain

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Cash Flows of the Project

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Financial charges – ignore in the project flows

– – Investment & Financing decisions are considered separately Avoids double counting as these charges are reflected in the hurdle rate

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Changes in working capital – consider with the project flows

– – Only changes are considered Need arise because account books are kept on accrual basis

Narain

Proforma Cash Flow Statement

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Cash flow from operations Profit before tax + Depreciation & other non-cash items + Interest & other non-operating items - Income tax paid - Increase in Working Capital Cash flow from investing Cash paid to acquire Fixed Asset Cash received for disposing Fixed Asset Cash flow from financing Interest/Dividend paid Capital funds raised

Narain

Cash flow computation

With the help of following projected Income Statement, calculate the cash inflow:

Net Sales Revenue Cost of goods sold 200000 475000

General expenses

Depreciation

100000

50000 350000

Profit before interest and taxes

Interest

125000

25000

Profit before tax

Tax @30% Profit after tax...