Analysis of Projected Cash Flows

7/28/2019 Analysis of Projected Cash Flows

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Analysis of Project Cash Flows



Categorization of Cash Flows

The Cash Flows are categorized into

three:

Initial Investment: The projection

includes Initial Outlay. This is rather firmand includes the Cost of Equipment,Working Capital etc

Cash Flow for Life: These are recurring

projections made usually on an yearlybasis

Terminal Cash Flow: These happentowards the end of the project.



Principles of Cash Flow Projection

Include only Incremental Cash Flows

Separate Financing Cash Flows

Only after-tax Cash Flows are

relevant

Include Side Effects

Ignore Sunk Cost

Include Opportunity Costs

Incorporate Working Capital



Format for Initial Cash Flow

(a) Cost of “new” asset(s)

(b) + Capitalized expenditures (e.g. installationcost, shipping expenses, etc)

(c) +(-) Increased (decreased) level of net workingcapital

(d) - Net proceeds from the sale of “old” assets if investments is a replacement decision

(e) = Initial Cash Outflow



Format for Interim IncrementalNet Cash Flow

(a) Net increase (decrease) in operating revenuesless (plus) any net increase (decrease) inoperating expenses, excluding depreciation

(b) -(+) Net increase (decrease) in tax depreciation

charges(c) = Net change in income before taxes

(d) -(+) Net increase (decrease) in taxes

(e) = Net change in income after taxes

(f) +(-) Net increase (decrease) in tax depreciation

charges(g) +(-) Decreased (increased) level of “net” workingcapital

(h) = Incremental net cash flow for the period



Format for Terminal YearIncremental Net Cash Flow

(a) Net increase (decrease) in operating revenues less(plus) any net increase (decrease) in operatingexpenses, excluding depreciation

(b) -(+) Net increase (decrease) in tax depreciation charges

(c) = Net change in income before taxes

(d) -(+) Net increase (decrease) in taxes(e) = Net change in income after taxes

(f) +(-) Net increase (decrease) in tax depreciation charges

(g) = Incremental cash flow for the terminal yearbefore project windup consideration

(h) + Final salvage value of “new” assets(i) +(-) Decreased (increased) level of “net” working cap

(j) = Terminal year incremental Net cash Flow



Computation of Cash Flow forNew Investments

0 1 2 3 4 5 6 7

Capacity (%) 25 40 50 75 100 100 100

Units (000) 5 8 10 15 20 20 20

Sales 600 960 1200 1800 2400 2400 2400

Less: Variable Cost 390 624 780 1170 1560 1560 1560

Contribution 210 336 420 630 840 840 840Less: Fixed Cost 420 300 300 300 300 300 300

PBDIT -210 36 120 330 540 540 540

Less: Depriciation 150 112.5 84.4 63.3 47.5 35.6 26.7

PBIT -360 -76.5 35.6 266.7 492.5 504.4 513.3

Less: Tax, 52% -187.2 -39.78 18.512 138.684 256.1 262.288 266.916

PAT -172.8 -36.72 17.088 128.016 236.4 242.112 246.384

Add: Depreciation 150 112.5 84.4 63.3 47.5 35.6 26.7Fund from Operations -22.8 75.78 101.488 191.316 283.9 277.712 273.084

Change in NWC -125 -25 -90 -60 -150 -150 0 0

Investment -600

Terminal Value 100

Release of NWC 600

NCF -725 -47.8 -14.2 41.5 41.3 133.9 277.7 973.1

Cash Flows (Rs.Lacs)Year



(A) Cash Flow (Incremental)Cost of new machine 15,00,000

Add: Additional working capital 1,00,000

Less: Sale value of existing machine 2,00,000

14,00,000(B) Incremental CFAT (Operating)

Year

Incremental

contribution

Incremental

depreciation

Taxable

income Taxes (35%) EAT (D-E) CFAT (F+C)

A B C D E F G

1 350,000 325,000 25,000 8,750 16,250 341,250

2 350,000 243,750 106,250 37,188 69,063 312,813

3 350,000 182,813 167,187 58,515 108,672 291,485

4 350,000 137,109 212,891 74,512 138,379 275,488

5 350,000 102,832 247,168 86,509 160,659 263,491

6 350,000 39,624 310,376 108,632 201,744 241,368




1. Incremental Depreciation (t = 1 – 6)

Year Incremental asset cost base (Rs.) Depreciation (25% on WDV) (Rs.)

1 1,300,000 325,000

2 975,000 243,750

3 731,250 182,813

4 548,437 137,109

5 411,328 102,832

6 308,496 77,124




2. (i) WDV of Existing machine at the beginning of Yr 5

2. (ii) Depreciation Base of New machine

2. (iii) Base for Incremental Depreciation

Initial cost of machine 1000000

Less: Depreciation @25% in yr 1 250000

WDV at beginning of yr 2 750000

Less: Depreciation @25% on WDV 187500


Less: Depreciation @25% on WDV 140625


Less: Depreciation @25% on WDV 105468.75

WDV at beginning of yr 5 316406.25

WDV of Existing Machine 316406 Add: Cost of New machine 1500000 Less: Sale proceeds of Existing Machine 200000

1616406

Depreciation base of a new machine 1616406 Less: Depreciation base of an existing machine 316406

1300000


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Analysis of Projected Cash Flows