Project cash flow

A project risk is the probability of an event that negatively impact the project cash flow. 

An (NPV) or (DCFRR) estimation will be no better than the accuracy of the projected cash flows over the life of the project. Clearly, one is likely to predict cash flows more accurately for 2 or 3 years ahead than, say, for 9 or 10 years ahead. However, since the cash flows for the later years are discounted to a greater extent than the cash flows for the earher years, the latter have less effect on the overall estimation. Nevertheless, the difficulty of predicting cash flows in later years and the inherent lack of confidence in these predictions are serious disadvantages of the (DCFRR) method. In this respect (NPV)s are more useful since they are calculated for each year of a project. Thus, a project with a favorable (NPV) in the early years is a promising one. 

Security of cash flow - lenders will analyse all factors which may have a bearing on the ability of the project to maintain Ac project cash flow comfortably beyond Ae prospective term of Ae borrowing mcluding, for instance, as mentioned m the previous section, Ae security of Ae Ael supply and contingency arrangement for alternative Ael ... 

This paper uses pyrolysis products from an air-blown, fluidized-bed reactor designed to produce liquids for use in adhesives as an illustration of what might be produced, separated and sold commercially for higher value. Guidelines for chemicals production and product recovery are suggested for pyrolysis processes in general. Recommended research and development topics to aid commercialization and increase chemical product recovery and project cash flow are presented. 

In addition to the projected cash flow, in period 16 the investor receives the maturity value of 100. The projected cash flows four our hypothetical 4-year floater are shown in Column (5). 

It is important to stress that this result holds regardless of the path 3-month LIBOR takes in the future. To see this, we replicate the process described in Exhibit 3.5 once again with one important exception. Rather than remaining constant, we assume that 3-month LIBOR forward rates increase by 1 basis point per quarter until the floater s maturity. These calculations are displayed in Exhibit 3.6. As before, the present value of the floater s projected cash flows is 100. When the market s required margin equals the quoted margin, any increase/decrease in the floater s projected cash flows will result in an offsetting increase/... 

A yield can be calculated given the projected cash flows based on an assumed prepayment rate. The yield is the interest rate that will make the present value of the assumed cash flows equal to the clean price plus accrued interest. A yield calculated in this manner is called a cash flow yield. 

Although it is commonly quoted by market participants, the cash flow yield suffers from limitations similar to the yield to maturity. These shortcomings include (1) the projected cash flows assume that the prepayment speed will be realized (2) the projected cash flows are assumed to be reinvested at the cash flow yield and (3) the mortgage-backed or asset-backed security is assumed to be held until the final payoff of all the loans in the pool based on some prepayment assumption. If the cash flows are reinvested at rate lower than the cash flow yield (i.e., reinvestment risk) or if actual prepayments differ from those projected, then the cash flow yield will not be realized. Mortgage-backed and asset-backed securities are particularly sensitive to reinvestment risk since payments are usually monthly and include principal repayments as well as interest. 

This last equation shows the direct relationship between the probability of default and the market credit default swap quotes. Therefore, using equation (21.14) and the term structure of credit, we may be able to boot-strap the market implied probability of default from the credit curves, which are in effect the range of credit default swap quotes by maturity. Equation (21.14) is only approximate because in practice we would need to ensure that the timing of projected cash flows are accurately reflected in the pricing model. For example, the actual payment on the contingent leg may depend on the settlement date for the swap. 

CDO Investor combines analytic tools with a historical database of publicly available CDO transactions. Investors can analyze their existing investments, as well as perform relative value analysis between different transactions. CDO Investor allows users to model projected cash flows, find current and historical ratings on CDO tranches, review details on underlying collateral, and make internal rate of return (IRR) projections. 

As noted in chapter 3, it is possible to calculate a bond s price given its yield and vice versa. As with a plain vanilla bond, a mortgage-backed bond s price is the sum of the present values of its projected cash flows. The discount rate used to derive the present values is the bond-equivalent yield converted to a monthly basis. 

Analysis based on net present value (NPV) calculations represents an alternative method for supporting decision-making under uncertainty. To measure the NPV of a project, the relevant project cash flows are specified and the time value of money is taken into account by discounting future cash flows by the appropriate rate of return (Shapiro 1991). The formula used to calculate NPV is ... 

In order to quantify the uncertainties in a project it is necessary to indicate the relative chances that a variable (e.g. selling price) will have different values. This can be done subjectively on the basis of, say, a 10% chance that the price will be as low as x, a 10% chance that the price will be as high as z against an expected mid-value of y. If it is assumed that the variables lie in a normal distribution in the range considered then the subjective probability estimates can be used to define the total distribution. Having made estimates of subjective probability distribution for each of the major variables we need a method of combining the various inputs to the project cash flows to obtain the resulting distribution of NPV or DCF, One such method is the Monte Carlo simulation. If there are a number of independent inputs to the project (capital, materials costs, etc) each represented by a probability distribution of values, then there is an infinite number of possible outcomes. Representatives of these... 

Table D Cumene-project—cash flow build up... 

It is important for firms to project their cash flow. This ensures that they will have funds on hand to pay their bills and their payroll and to invest in new projects. Cash flow is watched carefully by the finance department, because it is possible for a firm to make a profit on paper and still go broke because they do not have the cash needed to pay bills. When a firm invests in a new plant or new equipment, someone estimates the cash flow to calculate how the investment will influence the firm s ability to pay bills and dividends. In the example above the expenses were shown only as fixed or variable and the calculation was not concerned with the time period in which the expenses had to be paid. Likewise, the sales revenue was calculated on a per unit basis, but the sales may come at different time periods and some of the money for the sales may not be collected immediately. Based on historical records and contracts with suppliers and customers, the firm estimates its cash flow over the relevant time period. The cash flow analysis is shown in Table 3.1 for the example above. The cash flow analysis provides new information that the break-even analysis did not provide. It uses the period-by-period forecast to estimate when the firm will receive money and when it will pay out money. For the first seven months of the project the firm will have negative cash flow of 56,000. Then as sales pick up it will alternate positive and negative cash flows. Part of the reason for this is that revenue will be received 30 days after the product is sold, but the expenses to produce the product will be paid the month earlier. 

One economic evaluation method that is used is based on the internal return rate (IRR), which is considered suitable for an initial estimate of economic feasibility of industrial processes (Di Lucdo et al, 2002). This method is based on evaluating the discount rate that causes the present value of the cash flow, projected for the plant life, to be equal to the invested capital. The basic idea for the IRR evaluation is to obtain a single value that synthesizes the merits of the project for its lifetime. This value is not determined by market interest rates, and hence it is labelled internal return rate. The IRR is intrinsic to the project and does not depend on anything but the project cash flow. 

Your conpany is trying to determine whether to spend 500,000 in process inprovements. The projected cash flow increases based on the process inprovements are as follows. 

Payout period is defined as the time required for the recovery of the depreciable capital investment in the form of cash flow to the project. Cash flow would imply the total income minus all costs except depreciation. 

If NPV = 0, the projects cash flows are exactly sufficient to repay the required rate of return to those who invested capital in the company. 

When conducting NPV analysis, the terms nominal dollars and real dollars will be part of the conversation. Nominal dollars include the effects of inflation, whereas real dollars remove the effects of inflation. Nominal dollars are the actual amount of money making up cash flows real dollars reflect the purchasing power of the cash flows. Real dollars are found by adjusting the nominal dollars for the rate of inflation. Inflation affects both projected cash flows and the discount rate. While either real or nominal values can be used in NPV calculations, nominal values are used more often. If projected cash flows are in real dollars, the discount rate used should be the real rate. If projected cash flows are in nominal dollars, the discount rate used should be the nominal rate. 

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