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Project Appraisal: Cashflow

Project Appraisal: Cashflow. Corporate Finance 5. Project appraisal: cash flow. Identify and apply relevant and incremental cash flows in net present value calculations Recognize and deal with: Sunk costs Incidental costs Allocated overheads. Quality of information.

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Project Appraisal: Cashflow

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  1. Project Appraisal: Cashflow Corporate Finance 5

  2. Project appraisal: cash flow • Identify and apply relevant and incremental cash flows in net present value calculations • Recognize and deal with: • Sunk costs • Incidental costs • Allocated overheads

  3. Quality of information • Information varies greatly in its reliability, which often depends upon its source • The financial manager or analyst is often dependent on the knowledge and experience of other specialists • Relevance • Completeness • Consistency • Accuracy • Reliability • Timeliness • Low cost of collection compared with benefit to be gained by gathering more detail

  4. Are profit calculations useful for estimating project viability? • Accountants often produce a wealth of numerical information • Managers are often familiar with the notion of ‘the bottom line’ • Manager performance is judged using profit • However ‘profitable’ is not the same as achieving shareholder wealth maximisation

  5. Depreciation Exhibit 3.2 ABC plc: An example of adjustment to profit and loss account

  6. Working capital

  7. Net operating cash flow

  8. ABC plc: an example of profit to cash flow conversion Exhibit 3.3 ABC plc: an example of profit to cash flow conversion

  9. ABC plc: an example of profit to cash flow conversion

  10. ABC plc: an example of profit to cash flow conversion Exhibit 3.3 continued

  11. Incremental cash flows • Include all opportunity costs • Include all incidental effects • Ignore sunk costs • Be careful with overheads • Dealing with interest

  12. Lecture review • Raw data have to be checked for accuracy, reliability, timeliness, expense of collection, etc. • Depreciation is not a cash flow and should be excluded. • Profit is a poor substitute for cash flow. • Analyse on the basis of incremental cash flows. • Opportunity costs • Incidental effects • Sunk costs • Allocated overhead • Interest

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