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