ESTIMATION OF

PROJECT CASH FLOW

PREPARED BY
MOHINI DHARMACHANDANI
GUNJAN AGARAWAL
DIVYANG SHAH
ANKIT SAXENA
URVI SHAH
 ROAD MAP
 ELEMENTS OF THE CASH FLOW STREAM

 BASIC PRINCIPLE OF CASH FLOW STATEMENT

 CASH FLOW ILLUSTRATION

 CASH FLOW FOR REPLACEMENT PROJECTS

 BIASES IN CASH FLOW STATEMENT

ELEMENTS OF THE CASH FLOW STREAM

 COMPONENTS
 Initial Investment
 Operating cash inflow
 Terminal cash inflow

 TIME HORIZON FOR ANALYSES

 Physical life of plant
 Technological life of plant
 Product market life of plant
 Investment planning horizon of the firm
 BASIC PRINCIPLE OF CASH FLOW
STATEMENT

 Separation principle

 Incremental principle

 Post-tax principle

 Consistency principle
Separation principle

PROJECT

Financial side Investment side

 Incremental principle

Project cash flow for year t = cash flow for

the firm with project for year t - cash flow for
the firm without project for year t
 Incremental principle
Guidelines for estimating the incremental
cash flow of the project

 Consider all Incremental Effect

 Ignore sunk cost
 Include Opportunity cost
 Question the Allocation of overhead cost
 Estimate working capital properly
POST TAX PRINCIPLE

Important issues in assigning the impact of

tax
 Tax rate
 Treatment of losses
 Effect of noncash charges
CONSISTENCY PRINCIPLE

 Investor group

 Inflation
 Cash flow illustration
Particulars 0 1 2 3 4 5
FA (80)
NWC (20)
Revenues 120 120 120 120 120
Costs 80 80 80 80 80
Dep 20 15 11.25 8.44 6.33
PBT 20 25 28.75 31.5 33.67
Tax 6 7.5 8.63 9.47 10.10
Pat 14 17.5 20.12 22.09 23.57
Net s/v of FA 30
Recovery of NWC 20
Net cash
inflow/outflow (100) 34 32.5 31.37 30.53 79.9
CASH FLOW FOR REPLACEMENT
PROJECTS
 Initial investment = (cost of the new assets +
NWC Required for new assets) – (After tax s/v
realised form old assets + NWC Required for the
old assets)
 Operating Cash inflow = (Operating cash inflow
from the new assets) – (Operating cash inflow
from the old assets)
 Terminal cash flow = (After tax s/v of the new
assets + Recovery of the new working capital) –
(After tax s/v of the old assets + recovery of new
working capital)
BIASES IN CASH FLOW STATEMENT

OVERSTATING OF PROFITABILITY

 Intentional overstatement
 Lack of experience
 Myopic euphoria
 Capital rationing
BIASES IN CASH FLOW STATEMENT

Under-statement of Profitability

 Salvage value are Under-estimated

 Intangible benefits are Ignored
 The value of future options is overlooked
THANK YOU