Cash flow curves

The predicted cumulative cash-flow curve for a project throughout its life forms the basis for more detailed evaluation. Many quantitative measures or indices have been proposed. In each case, important features of the cumulative cash-flow curve are identified and transformed into a single numerical measure as an index. 

Cash-Flow Curves Figure 9-9 shows the cash-flow stages in a project together with their discounted-cash-flow values for the data given in Table 9-4. In addition to cash-flow and discounted-cash-flow curves, it is also instructive to plot cumulative-cash-flow and cumula-tive-discounted-cash-flowcurves. These are shown in Fig. 9-10 for the data in Table 9-4. 

The cost of capital may also be considered as the interest rate at which money can be invested instead of putting it at risk in a manufacturing process. Let us consider the process data listed in Table 9-4 and plotted in Fig. 9-10. If the cost oi capital is 10 percent, then the appropriate discounted-cash-flow curve in Fig. 9-10 is abcdef. Up to point e, or 8.49 years, the capital is at risk. Point e is the discounted breakeven point (DEEP). At this point, the manufacturing process... 

It is not normally possible to make a comprehensive assessment of profitabihty with a single number. The shape of the cumulative-cashflow and cumulative-discounted-cash-flow curves both before and after the breakeven point is an impoiTant factor. 

D. H. Allen [Chem. Eng., 74, 75-78 (July 3, 1967)] accounted for the shape of the cumulative-undiscounted-cash-flow curve up to the... 

Allen accounted for the shape of the cumulative-cash-flow curve... 

C. G. Sinclair [Chem. Process. E/ig., 47, 147 (1966)] has considered similar parameters to the (EMIP) and (IRP) based on a cumulative-discounted-cash-flow curve. 

No single value for a profitability estimate should be accepted without further consideration. An inteUigent consideration of the cumula-tive-cash-flow and cumulative-discounted-cash-flow curves such as those shown in Fig. 9-10, together with experience and good judgment, is the best way of assessing the financial merit of aprojec t. 

C-D The cash-flow curve turns up at C, as the process comes on stream and income is generated from sales. The net cash flow is now positive but the cumulative amount remains negative until the investment is paid off, at point D. 

Typically the net cash flow curve is discounted at a target return-on-investment (ROI) percentage and when the cumulative discounted cash curve crosses the zero line the business will have an ROI equal to objective. (See figures 4 and 9.)... 

Evaluating a predicted discounted net cash flow curve will determine to a large extent whether an R D result is worth commercialization. Uncertainties exist and have been incorporated in some analyses by increasing the discount percentage by an increment proportional to uncertainty. However, a prudent management must accept uncertainty risks and periodically reevaluate the decision to proceed. 

A cash flow curve for R D plus commercialization of a transmission voltage bushing is shown in figure 5. EPRI has funded this project since 1975. Total R D costs, including corporate cost sharing, will be about 700,000 when the project is complete this year. In comparison, forecast commercialization costs involve a temporary negative cash flow of over 5 million. Details of the cash flow are tabulated in figure 6. This table is provided only for illustration because realistic market and cost estimates are not yet available. 

The time profile of cash flows (including the total life of investments and the shape of cash flows over time) is itself an unknown both for the pharmaceutical industry and for other firms. Consequently, Baber and Kang examined several alternative assumptions about the life of investments (including R D as well as tangible capital facilities and equipment) and the shape of the cash flow curve in both pharmaceutical and nonphar-... 

Figure 4.28 Hypothetical cash flow curve for a drug research programme...

To obtain a feel for the economic value of the process, a calculation was made based on the assumption that the relative performance of Fig. 14 could be extrapolated directly to a 500-acre field with a 20-ft pay thickness at 1,000-ft depth. An acquisition cost of 50 cents/bbl of waterflood reserves was assigned to the acreage and all development costs were included. Operating costs applicable to the area where assigned and the chemical costs included. An economic summary of the projection is presented in Table 2 and the 6 per cent discounted cash flow curve is shown in Fig. 15 for the two floods. It can be seen from this information that the resulting production gains far override the cost of the polymer. Further economies can be expected from the fact that the polymer solution was produced intact and suitable... 

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