Question

What is (are) the most important cash flow(s) in a capital budgeting analysis? Why?

Answer 1

Cash flows can be divided into 3 parts

1) Initial investment: The expenses which are required to incurr immediately to start project. For example purchae price of machine, salvage price of old machine, Working capital needs etc

2) Annual Cash flow: The annaul cash flow that the project generates i.e sales less expense. Here depreciation is deducted first to find tax and then it is added back as it is non cash item. Further opportunity loss also forms part of cash flow

3) Terminal cash flow: Cash flow arising from termination of project are terminal cash flow. For example salvage value of machine, Release of WC etc