APPLYING

CASH FLOW
ANALYSIS
 Cost –Savings
 Vertical Integration
 Conglomerate Expansion

COST-SAVINGS PROJECTS
Aims to reduce operating costs without
adversely affecting outputs and revenues. Also
invests in assets or technologies that reduce
operating costs.
 INVESTMENT CASH FLOWS
The investments are in a new assets or
processes.
 OPERATING CASH FLOWS
are the differences in costs with and
without the cost-savings project after
taxes.
 TERMINAL VALUE CASH FLOWS
are cash proceeds after tax from the
sale of fixed assets and the recovery of
working capital at the end of the project’s
economic life.
Incremental cash flow analysis for cost-
savings projects is represented in the ff.
equation:
NCF(CS)= It + (Oeo – OEw)t + TVn

VERTICAL INTEGRATION PROJECTS

this involve increases in revenues,

reductions in costs and investment in fixed
assets in the line of business.
 INVESTMENT CASH FLOWS
Vertical integration projects require
substantial investments in fixed assets.
 NET OPERATING CASH FLOWS

are changes in both revenues and

operating costs arising from the projects.
 TERMINAL VALUE CASH FLOWS

are the cash value of fixed assets and

working capital at the end of the economic
life of the project.
 The incremental cash flow analysis for
vertical integration projects is found by
using the ff equation:
NCF(VI)t =-It + (Rw – R0)t + (OEO – Oew)t +
TVn

CONGLOMERATE EXPANSION PROJECTS

Involve increases in revenue and expenses

and investments in assets or new business
enable companies to gain economies of
scope, reduce risks and use central
management cost efficiently.
 INVESTMENT CASH FLOWS
Consists of the purchase of entire business
companies, the acquisition of fixed assets,
and additional working capital.
 NET OPERATING CASH FLOWS

in special case when the new project is

independent of a company’s existing
businesses, the cash flows of the new
business are likewise independent of the
existing business.
 TERMINAL VALUE CASH FLOWS
terminal value could either be:
 The resale value of the individual assets of
the business or
 The value of the new business itself.

Vertical integration projects that are

independent of the company’s existing
business, the formula simplifies the
equation:
NCF (CE)i= -It +(Rt-Et-Xt) + TVn