CASHFLOW STATEMENT

Cashflow Statement



Cashflow Statement

Cost of Capital =

8%

Case 1

Year

$ Mn

0

Development Costs

-25

1-~

Operational Costs

-30

1-~

Inflows

150

 

NetFlows

95

Net Present Value

$70.21

Case 2

Year

$ Mn

0

Development Costs

-57

1

Development Costs

-50

1-~

Operational Costs

-20

1-~

Inflows

150

 

NetFlows

23

Net Present Value

($1.27)

Project Appraisals

In modern times, the efficient allocation of capital resources is a most crucial function of financial management. This function involves organization's decision to invest its resources in long-term assets like land, building facilities, equipment, vehicles, etc. All these assets are extremely important to the firm because, in general, all the organizational profits are derived from the use of its capital in investment in assets which represent a very large commitment of financial resources, and these funds usually remain invested over a long period of time. The future development of a firm hinges on the capital investment projects, the replacement of existing capital assets, and/or the decision to abandon previously accepted undertakings which turns out to be less attractive to the organization than was originally thought, and divesting the resources to the contemplation of new ideas and planning. For new projects such as investment decisions of a firm fall within the definition of capital budgeting or capital expenditure decisions.

Capital budgeting refers to long-term panning for proposed capital outlays and their financing. Thus, it includes both raising of long-term funds as well as their utilization. It may, thus, be defines the “firm's formal process for acquisition and investment of capital”. To be more precise, capital budgeting decision may be defined as “the firms' decision to invest its current find more efficiently in long-term activities in anticipation of an expected flow of future benefit over a series of years.” The long-term activities are those activities which affect firms operation beyond the one year period. Capital budgeting is a many sided activity. It contains searching for new and more profitable investment proposals, investigating, engineering and marketing considerations to predict the consequences of accepting ...