1 / 29

Cash Flow Analysis

Cash Flow Analysis. What is Cash flow analysis?. Cash flow analysis deals with the timing and amount of cash inflows/outflows from a firm or an investment. Where do we start?. General Overview Types of Analysis Cash Flows in Capital Budgeting Comprehensive Example. Why Cash Flow Analysis?.

katima
Download Presentation

Cash Flow Analysis

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript


  1. Cash Flow Analysis

  2. What is Cash flow analysis? • Cash flow analysis deals with the timing and amount of cash inflows/outflows from a firm or an investment

  3. Where do we start? • General Overview • Types of Analysis • Cash Flows in Capital Budgeting • Comprehensive Example

  4. Why Cash Flow Analysis? • Profits and cash flows are very different things • Profits under the accounting system are calculated on accrual basis rather than cash basis Overview Analysis Budgeting Example

  5. Why Cash Flow Analysis? • As an investor much better to look at both Income Statement and the Statement of Cash Flows • As management, very important to analyze the different types of inflows/outflows for capital budgeting decisions Overview Analysis Budgeting Example

  6. Types of Analysis • Statement of CF Analysis • Free Cash Flows • Payback Period • Net Present Value • Internal Rate of Return Overview Analysis Budgeting Example

  7. Statement of CF Analysis • Cash Flow from Operating Activities • Cash Flow from Investing Activities • Cash Flow from Financing Activities Overview Analysis Budgeting Example

  8. Free Cash Flows Overview Analysis Budgeting Example

  9. Payback Period • A criteria used in capital budgeting. Defined as the number of years required to recover initial cash investment Overview Analysis Budgeting Example

  10. Payback Period: Example Overview Analysis Budgeting Example

  11. Net Present Value • In simple terms NPV is the sum of discounted cash inflows from a project- the projects initial outlay • If NPV is > 0 accept else reject Overview Analysis Budgeting Example

  12. NPV: Example Overview Analysis Budgeting Example

  13. Internal Rate of Return • Discount rate that equates the present value of inflows with the present value of outflows. In simple terms it reflects the rate of return for a project Overview Analysis Budgeting Example

  14. IRR: Example Overview Analysis Budgeting Example

  15. What is Capital Budgeting? • Capital budgeting is the decision making process through which firms decide which projects get the funding • Financial plans for most firms are based on the capital budgeting analysis using cash flows Overview Analysis Budgeting Example

  16. CF Guidelines in Capital Budgeting • Use Free Cash Flows Rather than accounting Profits • Only worry about incremental Cash Flows • Cash Flow diversion from other Product Categories Overview Analysis Budgeting Example

  17. Capital Budgeting Guidelines • Look for Incidental or Synergistic Effects • Working-Capital Requirements • Incremental Expenses • Opportunity Costs Overview Analysis Budgeting Example

  18. Comprehensive Example Overview Analysis Budgeting Example

  19. Comprehensive Example Overview Analysis Budgeting Example

  20. Comprehensive Example Overview Analysis Budgeting Example

  21. Comprehensive Example Overview Analysis Budgeting Example

  22. Comprehensive Example Overview Analysis Budgeting Example

  23. Comprehensive Example Overview Analysis Budgeting Example

  24. Comprehensive Example Overview Analysis Budgeting Example

  25. Comprehensive Example Overview Analysis Budgeting Example

  26. Practice Problem Using this data solve for the Free Cash Flows and then NPV and IRR. This problem is very similar to the example solved previously. Click here for answer

  27. Summary • Cash flow analysis is crucial for the success of a project and the firm • The most common type of analysis is Free Cash Flows analysis • Free Cash Flows can help with further analysis as they can be used in NPV and IRR calculations

  28. Reading List • Kewon, Martin, Petty and Scott Jr. Financial Management: Principles and Applications. New Jersey: Prentice Hall, 2000. • Ross−Westerfield−Jaffe .Corporate Finance, Seventh Edition. New York: McGraw−Hill Primis, 2005. • CFA Institute. Corporate Finance Readings. Charlottesville, CFA Institute, 2005. • http://en.wikipedia.org/wiki/Cash_flows

  29. Bibliography • Kewon, Martin, Petty and Scott Jr. Financial Management: Principles and Applications. New Jersey: Prentice Hall, 2000.(This book was heavily drawn upon. The comprehensive example format is very similar to what the author uses in the book.) • Ross−Westerfield−Jaffe .Corporate Finance, Seventh Edition. New York: McGraw−Hill Primis, 2005. • CFA Institute. Corporate Finance Readings. Charlottesville, CFA Institute, 2005. • http://en.wikipedia.org/wiki/Cash_flows

More Related