Estimation of Future Cash Flows:
Estimation of future cash flows is one of the topics of financial management. We identify it for evaluating a project prior to investment with capital budgeting. This is the starting point of investment analysis. We require two kinds of cash flows. One is cash outflow and other is cash inflow. Cash outflow is the cost of project. And Cash inflow is net revenue from that project. Assume that I purchased millions machine. This is the cost of project. Net profit from this project is millions in 5 years. In estimation of future cash flow, we have to guess whether cost of project is millions or other and we too have to guess whether total revenue of project is in millions or other.
Now the question is how to estimate the future cash flows? Therefore, my aim to write this content is to elucidate, how to estimate the amounts. Following are its two easy steps:
Estimation of the net cost of Project:
For estimating the future value of cash outflow, we have to estimate the given cost:
a) Estimating cost of purchasing the project:At first, we have to research in market and compute the cost of purchasing a new project.
b) Estimating additional cost of eliminating old project:Since, we have to use new project in similar place, therefore we have to sell old project or eliminate it from that place. Determine its cost? It will be our capital expenses and will be comprise in future cash outflow.
c) Estimating extra cost of installation of latest project:This extra cost will pay for installing latest project.
d) Estimating the cost of Inflation:Due to rising prices, it might be possible when next day; we will go to market for purchasing fixed asset, its cost might be double. Therefore, inflation cost will be added.Estimation of the Total Cash Revenue:
For computing total cash revenue, we will estimate net sale from that project. We all know that we purchase machine or project for rising our production or sale. Assume that machine will use for 10 years, we have to guess the sale of product generated from that machine in 10 years. We too compute the cost of revenue expenses. What expenditures will we pay in 10 years? It might be machine repair charges and other. Subsequent to deducting revenue expenditures from sale of products, we can compute cash revenue. For estimating cash inflow, we have to remove total tax. However we should not remove depreciation, interest and dividend.
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