Cash Position Table

Cumulative Cash Position Table To organize cash flow calculations, it is suggested that a cumulative cash position table be prepared by using an electronic spreadsheet. For this discussion. 

When equipment is added for plant expansions to an existing facility, it may be more convenient to use time zero when the first expenditures occur. The selection of either time base is satisfactory for economic analysis as long as consistency is maintained. 

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Example 8 Cumulative Cash Position Table (Time Zero at Start-up) A specialty chemical company is considering the manufacture of an additive for use in the plastics industry. The following is a list of production, sales, and cash operating expenses. 

Land for the project is available at 300,000. The fixed capital investment was estimated to be 12,000,000. A working capital of 1,800,000 is needed initially for the venture. Start-up expenses based upon past experience are estimated to be 750,000. The project qualifies under IRS guidelines as a 5-year class life investment. The company uses MACRS depreciation with the half-year convention. At the conclusion of the prmect, the land and working capital are returned to management. Develop a cash flow analysis for this project, using a cumulative cash position table (Table 9-25). 

Example 8 Cumulative Cash Position Table (Time Zero at Start-up). 9-28... 

Solution. The procedure for this problem is similar to that illustrated in Table 1 in that a trial-and-error method is used with various interest rates until a rate is found which decreases the net cash position to zero at the end of the useful life. Let r represent the profitability index or discounted-cash-flow rate of return with continuous cash flow and continuous interest compounding. 

The future worth of the total flow to the project after 10 years must be equal to the future worth of the total cash position at zero time (CPKto time) compounded continuously for 10 years minus salvage value, land value, and working-capital investment. Therefore, by Eq. (36) of Chap. 7 or part (e) of Table 3 in Chap. 7,... 

The method of evaluation for each of the criteria is given on Figure ElO.l and in Table ElO.l. Payback Period (PBP) = 3.85 years Cumulative Cash Position (CCP) = 170.5 x 10 ... 

Payback period methods are quite useful to indicate the liquidity of a project, otherwise stated as, how long it will take to receive your initial investment. In these two examples, it will take payback period is found to be 5.64 years and the discounted payback period is 8.71 years, identified by the turn to positive cumulative cash flow (Table 8.8). 

Since this calculation uses trial and error to find a discount rate at which all discounted negative and positive cash flows are equal, it can be tedious without a computer. Table 3 demonstrates this calculation for a simple set of cash flows. The DCF rate of return results in a single... 

The basis for the calculations will be L = 100m. Because the insulation comes in 1-cm increments, let us calculate the net present value of insulating the pipe as a function of the independent variable jc vary x for a series of 1-, 2-, 3-cm (etc.) thick increments to get the respective internal rates of return, the payback period, and the return on investment. The latter two calculations are straightforward because of the assumption of five even values for the fuel saved. The net present value and internal rates of return can be compared for various thicknesses of insulation. The cost of the insulation is an initial negative cash flow, and a sum of five positive values represent the value of the heat saved. For example, for 1 cm insulation the net present value is (r = 0.291 from Table 3.1)... 

Lines 1, 2, and 3 (investments) in Table 2 would normally only be filled in for the first column (discount factor of 1.000) which is designated as the zero year for the operation, with the unit actually going into operation at the start of the so-called first year. It is assumed that working capital and salvage value will be recovered in a lump sum at the end of the estimated service life, so these values are listed on lines 1, 2, and 13 as positive (incoming funds) numbers in the end-of-life column. Since these are lump-sum instantaneous values, the discount factor to apply to them is the finite (year-end) cash flow factor as shown in line 14 in the end-of-life column. 

The project team must detail all past costs that the project has incurred since its inception (start of EvP) on an annual basis. In addition, an annual project financial information table (ProFIT) data sheet should be presented. This sheet contains the revenue and cost forecasts for the upcoming ten-year period. It computes net present value (NPV) of future cash flows and return on capital employed (ROCE) automatically. At this stage, the team is expected to include detailed production costs data as well as estimates of plant costs (based on an engineering estimate, for example). The ten-year projection should be provided for three scenarios base, optimistic, and pessimistic. These cases are not meant to be simple percentage changes of the sales projections. Instead, the team should try to identify the drivers of the project s success and construct alternatives for the future that lead to different results for the project. The base case should be the most likely case. The optimistic scenario should be based on the positive development of some (not all) key success factors. The pessimistic scenario is usually the minimum feasible case, meaning a situation where the organization would still prusue the project, but some factors do not develop in a positive way. 

Adapted from Fraser et al (1981). The data in this table are calculated in 1977 dollars using municipal financing. The wastewater plant is a carbon-limited design for which a positive cash flow rather than an annualized cost is tabulated because of the wastewater treatment credit. 

Any number of methods for economic analysis could be employed here, a discounted cash flow analysis is used. Assume that (a) the heater replacement cost is 235,000 (b) the replacement heater will have a 20-year life and an 18,000 salvage value (c) fuel and maintenance savings are escalated at 6% per year (d) after tax cost of capital is 9%. Table III shows the results of the cash flow analysis of the proposed investment in a replacement heater. As is indicated, since the net cumulative discounted cash flow (+ 29,166) is positive, the replacement of the heater is justified. 

Returning to the previous example (Table 2), suppose that there is a cash flow such that = - 500 and Oq = 10, and Aq is independent of the positive cash flows in periods 1 through 5. All cash flows for the proposal are now completely specified, and... 

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