Utility cash flow

DecoveTj of Capital. In Figure 1, the annual book depreciation is used to retire the fixed capital investment. Whereas this accounting model does not correspond to the typical money flow, it is one possible model for recovery of capital. This model assumes that the investment is reduced each year by the amount of the annual depreciation. Another model (22) assumes that a uniform yearly book depreciation payment is made to an interest-bear sinking fund that accumulates to the depreciable fixed capital amount at the end of the venture. Using this second model, the investment is outstanding throughout the lifetime of the project. This also does not correspond to the actual money flow in most cases. ProfitabiUty analysis utilizes a third model based on discounted cash flows. 

The same questions may then be asked for different values of the probabilities p and po. The answers to these questions can give an indication of the importance to the company of P at various levels of risk and are used to plot the utility curve in Fig. 9-25. Positive values are the amounts of money that the company would accept in order to forgo participation. Negative values are the amounts the company woiild pay in order to avoid participation. Only when the utihty value and the expected value (i.e., the straight line in Fig. 9-25) are the same can net present value (NPV) and discounted-cash-flow rate of return (DCFRR) be justified as investment criteria. 

Using the cash flows derived from the increasing utility rates, calculating the rate-of-return would show 33.8% for a one-stage unit and 35.5% for a two-stage unit. The corresponding payback periods are 3.7 years and 3.4 years. 

Salvage value is the price that can be actually obtained or is imputed to be obtained from the sale of used property if, at the end of its usage, the equipment (property) still has some utility. Salvage value is influenced by the current cost of equivalent equipment, its commercial value, whether the equipment must be dismantled and relocated to have utility for others, and the (projected) physical condition of the equipment. Salvage value can be thought of as a cash flow that may occur several years in the future, but does not represent income for federal income tax purposes when received. 

The chapter considered the engineer s fear of financials and attempted to overcome it with a straightforward discussion of cash flow, income, and balance statements. The mathematics of these statements is simple arithmetic, but the confusion seems to come from not understanding a few key terms. The chapter also considered the utility of ratio analysis—what engineers might call dimensional analysis for companies—breakeven analysis, and the basics of the time value of money. Although a full discussion was beyond the scope of this chapter, the discussion served up the basics and may also serve to introduce more careful treatments in other courses or texts. 

Summarize your spending. Look over your cash flow analysis and summarize your spending in three categories. First, calculate the amount of your monthly fixed expenses. This includes rent or mortgage payments, utilities, car payments, gas and oil, and operating expenses. Second, calculate your necessary variable expenses. This includes taxes, insurance, car and home repairs, and doctor and dentist bills. Third, calculate your discretionary expenses. This includes gifts, contributions, and entertainment. 

Without any changes to the production network, the operating cash flows and the NPV of the network would be reduced by approximately 10% in comparison to the baseline values. However, by re-allocating production volumes within existing capacities, it is possible to restore previously earned operating cash flows. To do so, production volumes are shifted to the major site A, which is located in the Euro zone. Contrarily, site C, which is located in the USA, would not be utilized at all by the product groups included in the example. It should be noted that this does not imply a closure of the US site since only a subset of the product portfolio was included in the analysis. The net present value of the network is nevertheless affected by the US appreciation because of the restructuring costs associated with the re-allocation of production volumes. 

Sources of finance for company acquisitions as mentioned above can be from reserves or maybe taken a senior or subordinated debt. Alternatively a bond may be issued with various characteristics offering an annuity, a balloon payment or a combination of the two. A variety of convertible structures have been utilized for this purpose as asset sales and the use of the target s balance sheet. There has also been a place for royalty transactions where the future-value of product cash flows are securitized to provide capital in the near term to achieve a company acquisition. 

A characteristic of the pharmaceutical industry, and very likely other R D intensive industries, is the interrelationship among new products, the cash flows of the firm, profit expectations, and the utility-enhancing... 

From an EPRI or DOE investment viewpoint, R D expenditures can be justified in many cases where a manufacturer would not invest because the ROI calculated by EPRI or DOE is greater. EPRI s or DOE S more favorable ROI may result from two factors i.e. no payment for commercialization costs, and/or the fact that all the benefits and hence income to utilities or society accrue to EPRI or DOE while only a fractional market capture accrue to the competitive manufacturer. Thus with a better ROI, EPRI or DOE has more motive to pay for R D than the manufacturer even if cost of money were the same to both. In addition money may be less costly to EPRI or DOE than it is to the manufacturer hence a lower discount can be used for cash flow and longer time between investment and payoff can be acceptable. Such financial factors can explain to some extent logic which makes government investment in fusion R D tenable, while a manufacturer could not endure the decades of negative cash flow before a profit is even possible. 

The influence of different factors subject to uncertainty can be assessed by a sensitivity analysis. The most probable values are attributed to the base case. Then alternatives are generated by allowing errors in each factor, as for example variations in prices for raw materials, products or utilities, or different interest rates. The discounted cash flow analysis can determine which are the cost elements having the strongest influence on the NPV and DCFRR, and which are unimportant. This type of analysis is relatively simple to be done with a spreadsheet. The formulation of the problem in term of ratios can bring useful insights. 

A number of advocates of this theory have therefore recommended that utility functions be established and economic risk analysis conducted with respect to this theory. That is, projects with the greatest expected utility should be selected by rational economic decision mtikers. There tire many compelling features to this approach. However, it tdso involves the required development of the utility function, which is not a simple task the question of whose utility function should represent the firm and other perplexing problems. Also, it has been shown that current methods of risk cash flow analysis do represent a reasonable and rational approximation of the utility theory approach. There are tdso challenges to the axioms of existing theories of utility. Because of these and other detractions, the utility theory approach has not enjoyed popultirity among many practitioners. 

Because investment alternatives are generally modeled as cash flows over some time horizon, it is important to include the effects of inflation in economic equivalence calculations (Thuesen and Fabrycky 1994). This chapter illustrates measures of inflation and how to include it in cash flow analysis calculations. For the remainder of this chapter, the term inflation is utilized exclusively and deflation refers to negative inflation. 

Actual Dollar Analysis The actual cash flows must be calculated in each period. To convert the constant dollar flows, the inflation rate must be utilized as follows ... 

In order to model the asset s cash flow, it uses a Monte Carlo simulation to generate expected default times for each piece of collateral and utilizes Copula functions and equity indexes to estimate correlation in the default times. The default times allow CDOManager to determine the cash flow expected from each asset over the life of a transaction. Summing up the cash flow from all of the assets generates a picture of the expected future cash flow from the CDO collateral pool. 

Operating Cost and Economic Analysis. This section begins with a presentation of the annual costs of operating the proposed plant, that is, the cost sheet, as discussed in Section 17.2 and shown in Table 17.1. In addition to the total production cost on the cost sheet, it should provide an estimate of the cost per unit weight of the product (e.g., per lb, kg, ton, or tonne). Note that when cash flows are computed for different production rates from year to year, a separate cost sheet is required for each unique production rate. Note also that, in addition to appearing on the cost sheet, the utilities for each equipment unit and their costs should be sununarized in a separate table. 

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