Location via proxy:   [ UP ]  
[Report a bug]   [Manage cookies]                
Scribd
Upload
81 views11 pages

Capital Budgeting and Cash Flow Analysis

Capital budgeting involves committing large funds to long-term assets and projects whose returns are expected over many years. It is a continuous process carried out by multiple departments to determine a firm's future growth. Cash flow estimates are the most important and difficult part of capital budgeting analysis, as incorrect estimates can doom a project. Only cash flows directly resulting from a project are relevant to decision making; sunk costs and opportunity costs must also be considered along with project externalities and changes to net working capital.

Uploaded by

vishalmoradiya976gma
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
81 views11 pages

Capital Budgeting and Cash Flow Analysis

Capital budgeting involves committing large funds to long-term assets and projects whose returns are expected over many years. It is a continuous process carried out by multiple departments to determine a firm's future growth. Cash flow estimates are the most important and difficult part of capital budgeting analysis, as incorrect estimates can doom a project. Only cash flows directly resulting from a project are relevant to decision making; sunk costs and opportunity costs must also be considered along with project externalities and changes to net working capital.

Uploaded by

vishalmoradiya976gma
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd

Project Cash Flow Estimation

Financial Management

CAPITAL BUDGETING
Capital budgeting is a decision situation where large funds are committed (invested) in the initial stages of the project and the returns are expected over a long period of time. These decisions are related to allocation of investible funds to different long-term assets. Capital budgeting is a continuous process and it is carried out by different functional areas of management such as production, marketing, engineering, financial management etc.

BASIC FEATURES OF CAPITAL BUDGETING


Capital budgeting decisions have long-term implications. These decisions involve substantial commitment of funds. These decisions are irreversible and require analysis of minute details.

These decisions determine and affect the future growth of the firm.

Cash Flows
To be consistent with wealth maximization principle, an evaluation of a project must be based on cash flows and not on accounting profits To be able to use NPV technique or any other technique of capital budgeting analysis successfully and accurately, we must have
an unbiased estimate of the expected future cash flows of the project including time to completion and estimate initial investment/cost extremely important and most difficult task

Projects have failed or succeeded due to

incorrect or correct estimates of the cash flows of the project. If cash flow estimates are incorrect, it doesnt matter which technique we use, the project is doomed to fail

Relevant versus Irrelevant Cash Flows


The results of an acceptance of a project is to change the cash flows of a firm.
Cash flows of a firm that change because of the

project are called relevant cash flows; Any cash flows that does not change irrespective of the acceptance/rejection of the project is irrelevant to decision making and should not be considered.

Points of Consider
Sunk Costs
Opportunity Costs Project Externalities Change in Net Working Capital

Sunk Costs
Sunk CostsA cost that has already been

incurred and cannot be recovered irrespective of the decision to accept or reject the project. R&D, Market Research, Consultants Fees Is it relevant or irrelevant?

Opportunity Costs
Opportunity Costs--The cash flow foregone by using your resources in a particular way. Resources have multiple uses You can use them in one way to the exclusion of other uses and this gives rise to opportunity costs By using your own building for your business, you forego the rent that you could have earned by renting it to some one else. Is it relevant or irrelevant to decision making?

Project Externalities
Project Externalities--the effect of a new

project (positive or negative) on an existing project or division of a firm. For instance, introduction of a new model of a car on other existing models produced by the same firm. Is it relevant or irrelevant to decision making?

Net Working Capital


Change in Net Working Capital--Net

working capital is defined as current assets minus current liabilities. Investment in working capital is a cash outflow during the year in which investment takes place Any investment in working capital is a cash inflow during the last year of the project and must be treated accordingly

You might also like