Cash flows determination

Note that capital allowances do not appear in the expression since they are not items of cash flow. Capital allowances are calculated in order to determine the fiscal costs and thus the amount of tax payable. 

From the cash flow and cumulative cashflow some basic economic indicators can be determined. The cashflow determines the economic lifetime of the field. When the cashflow turns permanently negative due to decreasing revenues (e.g. revenues are... 

In Section 13.2, a number of economic indicators were derived from the annual cash flow the most useful being the economic life of the project, determined when the annual cashflow becomes permanently negative. 

Internal Return Rate. Another rate criterion, the internal return rate (IRR) or discounted cash flow rate of return (DCERR), is a popular ranking criterion for profitabiUty. The IRR is the annual discounting rate that makes the algebraic sum of the discounted annual cash flows equal to zero or, more simply, it is the total return rate at the poiat of vanishing profitabiUty. This is determined iteratively. 

Once the cash flow has been calculated, various yardsticks can be applied to determine the desirability of the project. The years for payout (payback) is often used. This is obtained by adding the cash flow each year, from the first year of construction, until the sum of the negative and positive cash flows reaches zero. The payout is usually reported in years to the nearest tenth, i.e., 5.6 years. 

Now that you have determined the likely savings in terms of annual process and waste-treatment operating costs associated with each option, consider the necessary investment required to implement each option. Investment can be assessed by looking at the payback period for each option that is, the time taken for a project to recover its financial outlay. A more detailed investment analysis may involve an assessment of the internal rate of return (IRR) and net present value (NPV) of the investment based on discounted cash flows. An analysis of investment risk allows you to rank the options identified. 

Economic analysis can determine the discounted profitability criteria in terms of payback period (PBP), net present value (NPV), and rate of return (ROR) from discounted cash flow diagram, in which each of the annual cash flow is discounted to time zero for the LHS system. PBP is the time required, after the construction, to recover the fixed capital investment. NPV shows the cumulative discounted cash value at the end of useful life. Positive values of NPV and shorter PBP are preferred. ROR is the interest rate at which all the cash flows must be discounted to obtain zero NPV. If ROR is greater than the internal discount rate, then the LHS system is considered feasible (Turton et al., 2003). 

This method can be generalized. Two alternatives can be compared by determining the rate of return of the difference between the cash flows of each plant. The cash flow for any period of time is the income minus the expenses. This will give the crossover interest rate above which one plant is best and below which the other is best. 

The key to the discounted cash flow methods is the determination of a proper interest rate. For this, two factors must be known. One is how much does it cost to obtain money The second is what is a reasonable amount of profit to expect from a plant The first depends on the source of money. This can be corporation earnings, the sale of stock, the issuance of bonds, the selling of assets, or borrowing from some outside source. The second depends on economic conditions. 

Assume that all other cash flows are fixed so that the profit to be maximized is total sales income minus the total cost of the constituents. Set up a linear programming model for determining the amount and blend of each grade of gasoline. 

Depreciation is entered as an indirect expense on the manufacturing expense sheet based upon the straight-line method. However, when one is determining the after-tax cash flow, straight-line depreciation is removed from the manufacturing expense and the MACRS depreciation is entered. This is illustrated under the section on cash flow. 

Factors for determining zero-time values for cash flows which occur at other than zero time. 

Cash Flow Method Cash flows for each case are determined, and the case that generates the greater cash flow is the preferred one. 

Since the QA/QC laboratory is concerned with the quality of the firm s products, it can influence product costs and revenues (the cash flow associated with the products). It determines acceptance or rejection of raw materials and feedstocks and assesses their market value for the purchasing department. It frequently initiates the processing of claims against vendors providing raw materials which are below grade specification but are nevertheless used. The lab also may be responsible for process monitoring to determine process parameters which minimize the production of scrap or off-grade product. 

In view of these variations it is of interest to determine the sensitivity of the payback period to changes in ethylene- and product prices. For this purpose, the period was calculated from the capital investment, 7, and the annual cash flow, R, as below,... 

Pomper (1976, p. 150) explicitly estimated terminal values and integrated them into his model. He calculated the additional cash flows generated by each alternative network configuration in the final period of the planning horizon as compared to the "do-nothing" option. To determine terminal values incremental cash flows were capitalized over a period of 10 years. However, this approach was only possible because all alternative final-period network configurations were known up front due to the backtracking solution procedure employed. 

In order to incorporate tax regimes into supply network design, the respective model has to maximize after-tax cash flows and be able to allocate transportation costs and determine optimal transfer prices. Determining optimal transfer prices is the most complex aspect because tax authorities have adopted strict rules regulating transfer pricing in order to... 

In order to maximize the net present value of after-tax cash flows the model proposed in Chapter 3.4.2 has to be extended to determine the taxes payable in each country. To this end, pre-tax country profits comprising profits realized at both production and distribution entities have to be calculated. While the pre-tax profit of distribution entities can be calculated easily by subtracting all costs incurred from revenues realized, additional adjustments are required for production entities. Instead of cash flows associated with capital investments, depreciation costs have to be considered to identify pre-tax profits. The following assumptions are made to simplify the calculation ... 

LBO financings require a healthy cash flow for interest payments and repayments of debt tranches. The net debt position also determines the equity value that can be realized for financial sponsors on exit. The two major levers for improved cash flow management are working capital management and a disciplined capital expenditure program. 

This chapter has been aimed at the revenue-earning project, the amounts of revenue leading to an annual cash flow, from which profitability, and hence economic feasibility, can be determined. But what if there are no revenues A new public service investment, such as a major (non-toll) road, or an overseas aid project, such as a water pipeline system for a sub-Saharan country, generate no revenues - yet may have huge investment costs. 

The investments for the construction period and the net cash flows for the 10-year operating lifetime can now be discounted to determine the net present values at various discount factors. The undiscounted payments and revenues can be seen in the left hand column ... 

To determine the required selling price of hydrogen, a cash flow analysis was performed using an after-tax internal rate of return (IRR) of 15%. Other major assumptions used in the analysis were equity financing for a 20 year plant life including two years of construction time, a 90% on-stream factor with 50% plant capacity in first year of production, 30% of capital investment is spent in the first year and 70% in the second year, a tax rate of 37%, and ten year straight-line depreciation. 

Example 6 Application of annuities in determining amount of depreciation with continuous cash flow and interest compounding. Repeat Example 5 with continuous cash flow and nominal annual interest of 6 percent compounded continuously. 

This discount factor, dnis the amount that would yield one dollar after n years if invested at an interest rate of i The discounted-cash-flow rate of return can be determined by the trial-and-error method illustrated in Table 1, where the annual cash flows are discounted by the appropriate discount factor to a total present value equal to the necessary initial investment. ... 

Example 2 Discounted-cash-flow calculations based on continuous interest compounding and continuous cash Row. Using the discount factors for continuous interest and continuous cash flow presented in Tables 5 to 8 of Chapter 7, determine the continuous discounted-cash-flow rate of return r for the example presented in the preceding section where yearly cash flow is continuous. The data follow. 

In the preceding treatment of discounted cash flow, the procedure has involved the determination of an index or interest rate which discounts the annual cash flows to a zero present value when properly compared to the initial investment. This index gives the rate of return which includes the profit on the project, payoff of the investment, and normal interest on the investment. A related approach, known as the method of net present worth (or net present value or venture worth), substitutes the cost of capital at an interest rate i for the... 

To illustrate the method for determining net present worth, consider the example presented in Table 1 for the case where the value of capital to the company is at an interest rate of 15 percent. Under these conditions, the present value of the cash flows is 127,000 and the initial investment is 110,000. Thus, the net present worth of the project is... 

Work sheet for presenting discounted-cash flow, present-value, and net-present-worth determinations ... 

Example 3 Determination of profitability index with continuous interest compounding and prestartup costs. Determine the discounted-cash-flow rate of return (i.e., the profitability index) for the overall plant project described in the following, and present a plot of cash position versus time to illustrate the solution. 

For investments 2 and 3, the present values of the cash flows to the projects are determined from the first two equations under part (c) of this problem, with i 0.15. The resulting net present worth are ... 

The preceding example clearly shows that inflation effects can be important in determining returns on investment. The best strategy for handling such effects is to use the discounted-cash-flow or present-worth method for reporting returns on investment with the results based on the after-tax situation. This method of reporting can be handled easily and effectively by use of an appropri-... 

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