Question

provide a cash flow time line describe each of its components.

Answer 1

Initial investment is the investment that is made in begginning of the project iin capital goods to start the project. It includes Equipment, working capital introduction, major installation of equipment and all the ancillery activities related to capital asset.

Years is the horizon of timeline on which the project is based. It varies from project to project.

Operating inflows is the inflow on operation of the project. It includes the profit after deucting all cost except non cash expenses. And then add the benfit from tax in such non cash expenses, we get operating cash flow.

Salvage value includes the realization from initial investment made like sale of equipment, recovery of working capital.

Require rate of return is the return that investers want from the project. Since we invest at t=0, but the inflows from the project is generated in the whole life of the project. So we use rate of return as dicounting factor to brings all those cash inflows at t=0 so that we can compare them with the initial investment. This process is known as NPV. If npv comes positive we accept the project.

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