Estimation of Cash Flow

1.Captial Budgeting:

The Process of analysis/analyzing, identifying and selecting, investment project, whose returns (Cash Flow) unexpected to extend beyond one year.

2.Five Possibilities:

New product or expansion of project replacement of equipment.
• R and D
• Exploration
• Other, Safety plants etc.

Estimation of Cash Flow Characteristics:

a. Relevant cash flow
b. Operation cost
c. After tax
d. Marginal tax

Initial Cash Flow:

a. cost of new assets.
b. (+) Capitalized expanditure.
c. {(+)-} Increased (decreased) Net Working Capital.
d. (-) Net proceed from sale of ‘Old’ assets if replacement.
e. {+(-)} Taxes (savings) due to sale of ‘Old’ assets if replacement.
f. Initial cash out flow.

Incremental Cash Flow:

a. Net income include depreciation in operating revenue less (plus) any net include despreciation in operating expenses excluding depreciation.
b. {-(+)} Net Increased (decreased) in tax despreciation.
c. Equal net change in income before taxes.
d. (-) Net include depreciation in taxes.
e. Equal Net change in income after taxes.
f. {+(-)} increase (decrease) in tax depreciation charges.
g. Equal incremental net cash flow for period.

Terminal Cash Flow:

a. Calculate the incremental net income for the terminal time frame.
b. {+(-)} Salvage value (disposal) of any sold or disposed Assets.
c. {-(+)} Taxes (tax Saving) due to asset sale or disposal of new asset.
d. {+(-)} Decrease (increase) level of net working capital
e. Equal terminal years incremental net cash flow.

Any company is considering the buy a new machine. The machine will cost $50,000 + $20,000 for shipping and installation and falls under the three years property class of MECRS.
Net Working Capital will rise by $5000. Mr. A forecast that revenue will increase by 10,000 for each of the next four years and will then be sold (Scrap) for 10,000 at the end of the four year, when the project ends.
Operating cost will rise by 70,000 for each of the next four years any company is in the 40% tax bracket. (Net income by Tax).

Experimental Research Methods:

• It is a causal research consisting upon independent variables and dependent variables.
• In this type of research, researcher possess power to influence variables.
• Treatment / Intervention is the unique thing, which makes it different from all other researcher.
• Treatment is given to respondant either before or after data collection. Like; Pharmaceutical
• Treatment could be physiological, phycological.
• Extraneous variable; other then independent variables and dependent variables, which can effect dependent are extraneous variable.
• Placebos effect; Fasle treatment given to a group of respondent.
• Controlled group; The group of respondent which is provided with placebos effect.
• Treatment level; Research conducted with many groups of respondent; (controlled groups).

Explanation of Estimation of Cash Flow - Experimental Research Methods