CASH FLOW ANALYSIS

PROFITABILITY

GENERAL CASH FLOW APPROACH

• CASH FLOW ANALYSIS PROVIDES A RIGOROUS METHOD TO COMPARE PROFITABILITY

• USES THE SAME COMPONENTS AS ROI CALCULATIONS

• ALLOWS FOR THE TIME VALUE OF MONEY AND ALSO FOR CHANGES IN COMPONENTS OVER TIME

CASH FLOW COMPONENTS

• INVESTED CAPITAL COMPONENTS• FIXED CAPITAL• WORKING CAPITAL• SALVAGE – ($0 FOR OUR ANALYSIS)• CAN INCLUDE LAND, BUT THIS IS TREATED LIKE

WORKING CAPITAL - NOT INCLUDED IN OUR ANALYSIS

• CAN INCLUDE PLANT AND CORPORATE COMPONENTS, BUT THESE DEPEND ON EACH ORGANIZATION - NOT INCLUDED FOR OUR ANALYSIS.

CASH FLOW COMPONENTS

• REVENUE COMPONENTS• REVENUES ARE BASED ON PRICE AND

PRODUCTION RATE• THESE CAN CHANGE OVER TIME AND

WITH TOTAL PRODUCTION RATE• ASSUME PRODUCTION AT DESIGN RATE

AND A CONSTANT PRICE FOR THE PRODUCT OVER THE PLANT LIFE, FOR THIS PROJECT.

COM COMPONENTS

• VARIABLE COMPONENTS• RAW MATERIALS• UTILITIES

• FIXED COMPONENTS• INSURANCE• PROPERTY TAXES

• ALLOCATED COMPONENTS• LABOR• MAINTENANCE• LABORATORY

• DEPRECIATION• BASED ON A DEFINED SCHEDULE• ADDED BACK IN AS A POSITIVE CASH FLOW

CASH FLOW CURVE - CONSTANT $

LAND

LAND

DIRECT FIXEDCAPITAL

WORKINGCAPITAL

WORKINGCAPITAL

$

TIME

DISCOUNTED CASH FLOW (DCRR)

• ALSO CALLED– INTERNAL RATE OF RETURN (IRR) – OR NET PRESENT WORTH (NPW)

• METHOD HAS BECOME A STANDARD FOR MANY COMPANIES.

• CAN BE DEFINED AS THE MAXIMUM INTEREST RATE AT WHICH FUNDS COULD BE REPAID FOR A 100% DEBT PROJECT WITH A TERM OVER THE LIFE OF THE PROJECT

• BASED ON DISCRETE OR CONTINUOUS CASH FLOWS, THOUGH NORMALLY CONTINUOUS ARE TREATED AS EQUIVALENT ANNUAL DISCRETE VALUES.

CALCULATION METHODOLOGY

• CALCULATE CASH FLOWS BASED ON CONSTANT $ AMOUNTS

• DETERMINE THE DISCOUNT RATE THAT WILL CONVERT THE CUMULATIVE SUM OF ANNUAL CASH FLOWS TO A $0 VALUE OVER THE LIFE OF THE PROJECT

• THE HIGHER THE DISCOUNT RATE, THE MORE PROFITABLE THE PROJECT.

DCRR CASH FLOW CURVE

$ TIMELAND

LAND +DFC

WORKINGCAPITAL

WORKINGCAPITAL

DCRR EXAMPLE• ASSUME PROJECT CASHFLOW

DCRR Example

YEAR 0 1 2 3 4 5 6 7 8 9 10 NPV

CASH FLOWCONSTANT $ -1000 100 120 160 180 200 220 240 220 200 180 820

DISCOUNT RATE  

5.00% -1000 95 109 138 148 157 164 171 149 129 111 370

10.00% -1000 91 99 120 123 124 124 123 103 85 69 61.6

11.25% -1000 90 97 116 117 117 116 114 94 77 62 0

15.00% -1000 87 91 105 103 99 95 90 72 57 44 -156

GRAPHICAL RESULTS

NPV vs DCRR

-200

-100

0

100

200

300

400

5.00% 7.00% 9.00% 11.00% 13.00% 15.00%

INTEREST RATE

NP

V($

)

PRIUS EVALUATIONGIVEN: PRIUS PURCHASED - SEPT 2002

WANTED: NPV OF INVESTMENT

BASIS: CAPITAL COST FOR PRIUS = 20000

CAPITAL COST FOR CONVENTIONAL - 16,500

INCOME TAX REBATE = 2000

MILEAGE DRIVEN PER YEAR = 12000

GAS MILEAGE = 42 mpg

GAS MILEAGE CONVENTIONAL = 22 mpg

GAS PRICES AVERAGED FOR EACH YEAR

ASSUME INFLATION RATE OF 3%/YEAR

PRIUS NPV

PRIUS CALCULATION (YEAR STARTS IN SEPT)YEAR Sep-02 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013CALC YEAR 0 1 2 3 4 5 6 7 8 9 10 11 12CAPITAL PRIUS 20000                        CAPITAL CONV 16500                        DELTA CAPITAL -3500                        TAX REBATE 2000                        NET CAPITAL -1500                        MILES DRIVEN   12000 12000 12000 12000 12000 12000 12000 12000 12000 12000 12000 12000GAL CONVENT   545 545 545 545 545 545 545 545 545 545 545 545GAL PRIUS   286 286 286 286 286 286 286 286 286 286 286 286DELTA GAS   260 260 260 260 260 260 260 260 260 260 260 260GAS PRICE/GAL   1.75 2 2.25 2.5 2.75 3 3.5 3.75 4 4 4.25 4.25INFLATION ADJ.   0.97 0.97 0.97 0.97 0.97 0.97 0.97 0.97 0.97 0.97 0.97 0.97SAVINGS   441 504 567 630 693 756 882 945 1008 1008 1071 1071

 CASH FLOWS -1500 441 504 567 630 693 756 882 945 1008 1008 1071 1071DISCOUNT RATE   NPV

5.00% -1500 420 457 490 518 543 564 627 639 650 619 626 596 524910.00% -1500 401 416 426 430 430 427 453 441 427 389 375 341 345615.00% -1500 383 381 373 360 344 327 332 309 286 249 230 200 227538.78% -1500 318 262 212 170 135 106 89 69 53 38 29 21 0