Question

How are cash flows for a project estimated?

what are the investment rules?

Answer 1

Cash flows of a project is estimated according to the future business environment. Cash flows are estimated for every kind of market condition in the future. For attaining net cash flows, the incremental cost, repair and maintenance, depreciation, salvage value, tax are considered.

Investing for a project requires some initial homework to be done. One should know whether the project will give positive return if invested. One should know whether the inflows of the project during its life will be recovered applying a certain percentage of return that is required. Hence a set of instrument is used to see the project viability. Some instrument for this are Payback Period, NPV, IRR, Profitability Index etc. By Payback Period we know how long it will take to recover the investment. By NPV we come to know whether present value of all inflows recover our investment. By IRR we know whether the return given by the project is sufficient enough to cover the required rate of return. By PI we can rank the project with some other projects in hand to be taken. So, by these instruments not only that we see the project profitability, but we can compare the project with other ventures if we have any alternatives available at the time.