CASH FLOW ANALYSIS PROFITABILITY

GENERAL CASH FLOW APPROACH CASH FLOW ANALYSIS PROVIDES A RIGOROUS METHOD TO COMPARE PROFITABILITY USES THE SAME COMPONENTS AS ROI CALCULATIONS ALLOWS FOR THE TIME VALUE OF MONEY AND ALSO FOR CHANGES IN COMPONENTS OVER TIME

CASH FLOW COMPONENTS INVESTED CAPITAL COMPONENTS FIXED CAPITAL WORKING CAPITAL SALVAGE – ($0 FOR OUR ANALYSIS) CAN INCLUDE LAND, BUT THIS IS TREATED LIKE WORKING CAPITAL - NOT INCLUDED IN OUR ANALYSIS CAN INCLUDE PLANT AND CORPORATE COMPONENTS, BUT THESE DEPEND ON EACH ORGANIZATION - NOT INCLUDED FOR OUR ANALYSIS.

CASH FLOW COMPONENTS REVENUE COMPONENTS REVENUES ARE BASED ON PRICE AND PRODUCTION RATE THESE CAN CHANGE OVER TIME AND WITH TOTAL PRODUCTION RATE ASSUME PRODUCTION AT DESIGN RATE AND A CONSTANT PRICE FOR THE PRODUCT OVER THE PLANT LIFE, FOR THIS PROJECT.

COM COMPONENTS VARIABLE COMPONENTS RAW MATERIALS UTILITIES FIXED COMPONENTS INSURANCE PROPERTY TAXES ALLOCATED COMPONENTS LABOR MAINTENANCE LABORATORY DEPRECIATION BASED ON A DEFINED SCHEDULE ADDED BACK IN AS A POSITIVE CASH FLOW

CASH FLOW CURVE - CONSTANT $

DISCOUNTED CASH FLOW (DCRR) ALSO CALLED –INTERNAL RATE OF RETURN (IRR) –OR NET PRESENT WORTH (NPW) METHOD HAS BECOME A STANDARD FOR MANY COMPANIES. CAN BE DEFINED AS THE MAXIMUM INTEREST RATE AT WHICH FUNDS COULD BE REPAID FOR A 100% DEBT PROJECT WITH A TERM OVER THE LIFE OF THE PROJECT BASED ON DISCRETE OR CONTINUOUS CASH FLOWS, THOUGH NORMALLY CONTINUOUS ARE TREATED AS EQUIVALENT ANNUAL DISCRETE VALUES.

CALCULATION METHODOLOGY CALCULATE CASH FLOWS BASED ON CONSTANT $ AMOUNTS DETERMINE THE DISCOUNT RATE THAT WILL CONVERT THE CUMULATIVE SUM OF ANNUAL CASH FLOWS TO A $0 VALUE OVER THE LIFE OF THE PROJECT THE HIGHER THE DISCOUNT RATE, THE MORE PROFITABLE THE PROJECT.

DCRR CASH FLOW CURVE

DCRR EXAMPLE ASSUME PROJECT CASHFLOW DCRR Example YEAR NPV CASH FLOW CONSTANT $ DISCOUNT RATE 5.00% % % %

GRAPHICAL RESULTS

PRIUS EVALUATION GIVEN:PRIUS PURCHASED - SEPT 2002 WANTED:NPV OF INVESTMENT BASIS:CAPITAL COST FOR PRIUS = CAPITAL COST FOR CONVENTIONAL - 16,500 INCOME TAX REBATE = 2000 MILEAGE DRIVEN PER YEAR = GAS MILEAGE = 42 mpg GAS MILEAGE CONVENTIONAL = 22 mpg GAS PRICES AVERAGED FOR EACH YEAR ASSUME INFLATION RATE OF 3%/YEAR

PRIUS NPV PRIUS CALCULATION (YEAR STARTS IN SEPT) YEARSep CALC YEAR CAPITAL PRIUS20000 CAPITAL CONV16500 DELTA CAPITAL-3500 TAX REBATE2000 NET CAPITAL-1500 MILES DRIVEN GAL CONVENT 545 GAL PRIUS 286 DELTA GAS 260 GAS PRICE/GAL INFLATION ADJ SAVINGS CASH FLOWS DISCOUNT RATE NPV 5.00% % % %