CF Computation

1) WC Changes / Investment

Initial Investment in Working capital is considered as initial outflow ( Y0)

Increase in Working capital Balance i.e. Additional Investment is made to working ca

Decrease in Working capital Balance i.e. Release of WC invested ( Inflow to investor

Increase in WC "- From CF"

Decrease in WC "+ to CF "

Compute WC Changes

Year 0 1
Sales 400000

Initial WC Invested -50000

thereby 20% of sales to be kept as WC at the beginning of each year from y2 onward

-110000
-50000 -60000

Situation 2: Compute WC changes

Year 0 1
Sales 400000

Initial WC Invested -60000

Thereafter WC Balance to be increased by $.4 for every $1 Increase in sales to the be

-120000
-60000

What will be your answer if WC investment to be increased by .4$ for every 1 increa

Increase in Working capital 60000 120000

Working Capital Balances 60000 180000
Investment appraisal techniques

1) Pay back period : Time period to get back the amount Invested

a) Uniform cash flows: Initial Investment/ Annual Cash flows

Initial Investment 400000

CF expected for six years 75000

PBP 5.33333333333333

B)

Year CF Computation
0 -40000
1 12000
2 14000
3 21000
4 18000

65000 0.6666666667

8
PBP 2 years 8 months

Within Target Payback period Accept

Comparable projects Option with lower payback to be selected

Merits

1) Simple to compute and understand

2) Most Suitable for rapidly changing business
3) Improves liquidity and reduces uncertainity by selecting lower [ay back period projects

Demerits
1) It does not consider whole life or cash flows
2) Ignore time value of money

Discounted Pay back period

It Overcome the limitation of pay back period ( Ignorance of time value of money )
So it is the time period to get back the amount invested in present value terms.
Year Cashflow Discount DPBP
0 -40000 1 -40000
1 12000 0.909 10908
2 14000 0.826 11564
3 21000 0.751 15771
4 18000 0.683 12294

Answer DPBP 3 years 2 months

3) NPV Pv of cash inflows - Pv of cash outflows

It considers the whole stream of cash flows, time value of money directly connects w

Decision rule

Independent individual projects If NPV > 0 Accept the project

If NPV <0 Reject the project
NPV>0 Accept/ Reject

In case of mutually exclusive projects: Project with Higher NPV to be selected subjected to more than 0

For eg:
Working Note : WACC

Particulars Cost of Capital Propotion WACC

Ke 0.11 0.8 0.088
Kd 0.0602 0.2 0.01204

WACC 10.00%

Year 0 1 2
Demand 400 500
Sales 3200 4000
Variable costs 2000 2500
Other Variable costs 760 950
Fixed Costs 240 260
PBT 200 290
Depreciation 200 150
0 140
Tax 0
Depreciation 200 150
Scrap value
Initial Investment -800

Total -800 200 290

NPV ₹ 877.22 ₹ 77.22

Working note : Depreciation

Particulars 1 2
Initial Value 800 600
Depreciation 200 150
WDV 600 450

Years 0 1 2
Sales 5160 24883
Variable Costs -2064 -9585
Contribution 3096 15299
Fixed Costs -2700 -2970
Training costs -4128 -958
Depreciation -525 -525
Profit before tax -4257 10845
Tax 851 -2169
Profit after tax -3406 8676
WC -1032 -1972.32 -2494.5408
Initial Investment -35000
Scrap value
Dep 525 525

Total -36032 -4852.92 6706.536

NPV ₹ -672.22

Sales
0 1 2
Drones 4.3 19.2
Sales Price 1200 1296
Sales 5160 24883

Variable costs 480 499

Variable costs per unit 2064 9585

Fixed Costs 2700 2970

WC 1032 1972 2495

NPV does not compare facilitate comparison between size of investment and NPV
nitial outflow ( Y0)

estment is made to working capital ( Outflow to investment )

C invested ( Inflow to investor )

2 3 4 5
550000 800000 1035000 900000

g of each year from y2 onwards

-160000 -207000 -180000 0

-50000 -47000 27000 180000

2 3 4 5
550000 800000 1035000 1140000

y $1 Increase in sales to the beginning of the year

-220000 -314000 -356000 0

-100000 -94000 -42000 356000

eased by .4$ for every 1 increase in sales to the beginning of the year

220000 314000 356000 1070000

400000 714000 1070000
 38243

1757

0.142915243208 1.714982918497

e of money directly connects with wealth of shareholders

 3 4
600 600
4800 4800
3000 3000
1140 1140
280 300
380 360
112.5 307.5
267.5 52.5
-42 -80.25 -15.75
112.5 307.5
30

338 309.75 -15.75

3 4
450 337.5
 112.5 307.5
337.5 30

3 4
49829 38396
-18482 -13714
31346 24682
-3267 -3593.7
-1848 -1371
 -525 -1225
25706 18492
-5141 -3698
20565 14793
1143.258624 4356

7000
525 1225

22233.04992 27373.83872256

3 4
35.6 25.4
1400 1512
49829 38396

519 540
18482 13714

3267 3594

-1143 4356
235000