ROMEO S. MARTIN, JR.

BS ACCOUNTANCY

FIN3N FINANCIAL MANAGEMENT 2 PROF. MICHAEL AUDITOR, CPA, MBA

Synthe ! "n C# h F$"% E t!&#t!"n In analyzing investment proposal, estimating cash flow is of utmost necessity. Cash flows refer to inflows and outflows of cash. Cash estimation takes a vital role in capital budgeting. Three important sets of computation are needed: ( ! the initial investment outlay or net cash outflow, ("! the annual net cash inflow, and (#! the terminal cash flow or the cash inflow for the final year. The initial investment outlay is the sum of all cash outflows and cash inflows occurring at zero time periods. $et investment refers to the amount of which will be re%uired for the ac%uisition of fi&ed assets. Thus, initial investment of a new pro'ect comprises cost, freight, installation charges and customs duties among others. (or a replacement pro'ect)case, factors as cash salvage value, ta& ad'ustment and working capital are taken in mind. In the determination of annual net cash inflow or cash inflow after ta&, net cash inflow is determined during the life of the pro'ect. It is determined on the basis of accounting for cash flow concept. To determine net cash inflow, interest amount is not included. To compute it, add cost of new and old machine to annual revenue* deduct cash e&penses* deduct annual depreciation* deduct ta& e&pense* add back depreciation. Terminal net cash flow may be different due to course of working capital and salvage value of assets. If working capital is invested in initial stage, less in net cash outflow and plus in final year net cash inflow, it is the release of working capital. (inal year net cash inflow is also affected by salvage value of assets. (or new proposal, annual cash flow is added with cash salvage value of the pro'ect* less ta& paid on profit

ROMEO S. MARTIN, JR. BS ACCOUNTANCY

FIN3N FINANCIAL MANAGEMENT 2 PROF. MICHAEL AUDITOR, CPA, MBA

on sale of assets* add ta& saved on loss on sale of assets* add working capital decreases. (or a replacement proposal, add costs of new and old machine and annual cash flow after ta& with cash salvage value of the machine* less ta& paid* add ta& saved* add working capital increase* less working capital decrease. +ince it is influential in the firm,s ability to use low-cost debt, to maintain smooth operations over time, and to avoid crises that might consume management,s energy and disrupt its employees, customers, suppliers, and community, corporate risk is arguably essential. +ensitivity analysis is a techni%ue that shows how much a pro'ect,s $./ will change in response to a given change in an input variable such as sales, other things held constant. +cenario analysis is a risk analysis techni%ue in which the best- and worst-case $./s are compared with the pro'ect,s e&pected $./. 0onte Carlo simulation is a risk analysis techni%ue that uses a computer to simulate future events and thus to estimate the profitability and riskiness of a pro'ect. In reflection, cash flows take a relatively huge part in the decision-making process of purchasing or replacing long-term assets as property, plant and e%uipment. Cash flow estimation is likewise important in deciding whether to pursue or not new product lines 1 bearing in mind their effect on over-all sales and the sales of other product lines, so as they tend not to 2cannibalize3 other product lines.