Question

• The author of Financial Management mentions seven issues that have to be kept track of during a comprehensive cash flow estimation process. Explain the role of each, when estimating cash flow.

Answer 1

There are seven issues that have to be kept track of during a comprehensive cash flow estimation process

They are as follows-

1)Working capital:

It occurs when current asset changes that occur as a result of a new project, usually, at the end of the project, these additional cash flows are recovered and must be accordingly shown as cash inflows. Even though the net cash outflows—due to increase in net working capital at the start may equal the net cash inflow arising from the liquidation of the assets at the end, the time value of money effects make these cost relevent for project.

2) Opportunity costs:

it entails cost which is not obivious, but result from benefits being lost as a result of taking on a project. For example, if a firm decides to use an idle piece of equipment as part of a new business, the value of the equipment or machinaries that could be realized by either selling or leasing it would be a relevant opportunity cost.

3)) Synergy gains:

This like and an extra gain that company generates while selling product or any other service company provides so it helps with exsiting product sell other product or sevices for a company.

4) Sunk costs:

it is nothing but expenses which are already incurred for a company, or that will be incurred,this cost will be incurred regadless you under take the project.

5)Erosion costs:

it shows up in cash when a new product or service competes with revenue generated by a current product or service offered by a company.

6)Capital expenditures:

When company spends capital to acquire a productive asset, it is allowed to expense a portion of the cost of the asset each year, as a process of cost recovery via the reduced taxes that result from the write off in cash flow

7) depreciation:

Depreciation for any company you take the depreciation expense listed on the income statement and add it to cash flow as it is a non-cash item and the portion written off in the income statement is depreciation expense