Projecting Cash Flow

Topics: Net present value, Investment, Internal rate of return Pages: 1 (314 words) Published: April 10, 2013
Projecting Cash Flow

Projecting cash flow is a vital aspect of managing a business. Cash flow covers expenses, which is why start-ups often seek financing or loans--to provide a base of capital to fund the business while waiting for cash flow. Here is how to project your cash flow. Estimating the incremental cash flow requires from the investment itself, acquiring and disposing of the investment’s assets and the cash flows from the operating the investment. Those affected by the revenues, expenditures, depreciation and taxes. The bottom line of the cash flow is that a set of net cash flow for each period associated with investment decision. After estimating cash flow which arises from an investment opportunity, the techniques apply to this cash flow to assess the attractiveness of the opportunity. The techniques produce a result in terms of the length of time to pay back the investment (the payback period and the discounted payback period) the value added (net present value) the benefit cost ratio ( the profitability index) or the return (the internal rate of return and modified internal rate of return). The evaluate cash flow using capital budgeting techniques are only estimates. The future is not known with certainty and neither is future cash flow. Therefore business should consider the degree of uncertainty into the decision making. This can be done by adjusting the discount rate associate with the project by the amount of risk. Specifically it should be adjust the discount rate for the amount of systematic risk associate with the project. In conclusion, in most general circumstances the internal rate of return, net present value and profitability index will produce similar results regarding accepting an investment project. However if there is a limit on the capital budget or if projects are mutually exclusive, the investors should be careful in selecting the technique to use in the investing selection process
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