Submitted by: Submitted by krishanptfms
Views: 125
Words: 1146
Pages: 5
Category: Business and Industry
Date Submitted: 09/16/2013 11:24 AM
Cost – Benefit measurement
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
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
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
Cash Flows of the Project
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
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
1.
2.
3.
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...