Project Appraisal: Cashflow

1. Project Appraisal: Cashflow Corporate Finance 5

2. Project appraisal: cash flow • Identify and apply relevant and incremental cash flows in net present value calculations • Recognize and deal with: • Sunk costs • Incidental costs • Allocated overheads

3. Quality of information • Information varies greatly in its reliability, which often depends upon its source • The financial manager or analyst is often dependent on the knowledge and experience of other specialists • Relevance • Completeness • Consistency • Accuracy • Reliability • Timeliness • Low cost of collection compared with benefit to be gained by gathering more detail

4. Are profit calculations useful for estimating project viability? • Accountants often produce a wealth of numerical information • Managers are often familiar with the notion of ‘the bottom line’ • Manager performance is judged using profit • However ‘profitable’ is not the same as achieving shareholder wealth maximisation

5. Depreciation Exhibit 3.2 ABC plc: An example of adjustment to profit and loss account

6. Working capital

7. Net operating cash flow

8. ABC plc: an example of profit to cash flow conversion Exhibit 3.3 ABC plc: an example of profit to cash flow conversion

9. ABC plc: an example of profit to cash flow conversion

10. ABC plc: an example of profit to cash flow conversion Exhibit 3.3 continued

11. Incremental cash flows • Include all opportunity costs • Include all incidental effects • Ignore sunk costs • Be careful with overheads • Dealing with interest

12. Lecture review • Raw data have to be checked for accuracy, reliability, timeliness, expense of collection, etc. • Depreciation is not a cash flow and should be excluded. • Profit is a poor substitute for cash flow. • Analyse on the basis of incremental cash flows. • Opportunity costs • Incidental effects • Sunk costs • Allocated overhead • Interest