Which one of the following correctly defines operating cash flow?
Which one of the following correctly defines operating cash flow?
Operating Cash Flow (OCF) is the amount of cash generated by the regular operating activities of a business within a specific time period.
What is operating cash flow formula?
Operating Cash Flow = Operating Income + Depreciation – Taxes + Change in Working Capital. Cash Flow Forecast = Beginning Cash + Projected Inflows – Projected Outflows = Ending Cash.
Which one of these explains the after tax cash flow formula for the sale of an asset?
Which one of these explains the after-tax cash flow formula for the sale of an asset? The cash flow equals the book value plus the after-tax value of any gain or loss on the sale. Rationale: ATCF = Book value + (Market value – Book value)(1 – TC).
Why are financing costs excluded from project cash flows?
Any increase in the current level of sales, costs, or necessary assets of a firm’s existing operations caused by a new project. Why are financing costs excluded from project cash flows? Financing costs are included in the required return used to discount project cash flows.
How are taxes computed when a project’s EBIT is negative?
How are taxes computed when a project’s EBIT is negative? The tax rate is multiplied by EBIT producing a tax credit.
Why is interest expense not included in capital budgeting?
If the project is financed entirely with equity capital, the discount rate may be the opportunity cost of the funds. If the discount rate is designed to represent the cost of capital for the business project, interest expense should not be included as an operating cash flow.
How is depreciation calculated in capital budgeting?
First, we deducted it while calculating the net income in the income statement. Then we added the same amount back while calculating cash flows, thus nullifying its effect….Depreciation Tax Shield.
| With Depreciation | Without Depreciation | |
|---|---|---|
| Depreciation | $500 | $0 |
| PBT | $1500 | $2000 |
| Tax @ 40% | $600 | $800 |
| PAT | $900 | $1200 |
Does IRR include interest?
Q: Should we deduct interest expense when calculating the IRR on a project? A: No. For most capital budgeting applications, interest expense should not be deducted from forecast cash flows when calculating IRR.
What are the general categories of capital budget scenarios?
Your capital budget contains four basic components and a separate listing for other projects that don’t fit into one of the primary categories.
- Replacement and Repair of Existing Equipment.
- Regulatory Requirements.
- Expansions and Improvements.
- Additions and Acquisitions.
What are the capital budgeting techniques?
Capital Budgeting Techniques
- Payback period method. In this technique, the entity calculates the time period required to earn the initial investment of the project or investment.
- Net Present value.
- Accounting Rate of Return.
- Internal Rate of Return (IRR)
- Profitability Index.
What are five methods of capital budgeting?
There are several capital budgeting analysis methods that can be used to determine the economic feasibility of a capital investment. They include the Payback Period, Discounted Payment Period, Net Present Value, Profitability Index, Internal Rate of Return, and Modified Internal Rate of Return.
What types of projects require the least detailed and the most detailed analysis in the capital budgeting process?
Projects like expansion, acquisition, modernization, and replacement of long term assets require more detailed analysis because capital budgeting decisions involve large commitments of money and are irreversible in nature. Other projects not listed above require less detailed analysis.
Why are interest charges not deducted when a project’s cash flows are calculated for use in a capital budgeting analysis?
The interest charges are not deducted when a project’s cash flows are calculated for use in a capital budgeting analysis because the cost associated with financing are reflected in the. Generating cash flow daily can be costly and no more accurate than annual estimates.
What is a mutually exclusive project how should managers?
11.4 What is a mutually exclusive project? How should managers rank mutually exclusive projects? A mutually exclusive project is a project that if accepted, the company cannot accept any other projects during that time. Mangers should rank them starting with the highest NPV.
Why sunk costs should not be included in a capital budgeting analysis but opportunity costs and externalities should be included?
A sunk cost is a cash outlay that has already been incurred and which cannot be recovered regardless of whether a project is accepted or rejected. Since sunk costs are not increment costs, they should not be included in the capital budgeting analysis.
Are sunk costs relevant in capital budgeting?
Capital budgeting decisions are based on current and future incremental cash flows and not any past cash flows. Therefore, in calculating net initial investment outlay, analysts need to ignore the sunk costs but include opportunity costs in their analysis.
Is cannibalization a cash flow?
Incremental cash flow refers to cash flow that is acquired by a company when it takes on a new project. In the event that a reduction in the cash flow of another aspect or product is the result of taking on a new project, then it is called cannibalization. Incremental cash flow is important in capital budgeting.
Why do we focus on cash flows as opposed to net income?
We focus on cash flows rather than accounting profits because these are the flows that the firm receives and can reinvest. Only by examining cash flows are we able to correctly analyze the timing of the benefit or cost. Thus, accounting profits become lower and, in turn, so do taxes, which are a cash flow item.
Why is cash flow most important?
In this example, cash flow is more important because it keeps the business running while still maintaining a profit. Alternately, a business may see increased revenue and cash flow, but there is a substantial amount of debt, so the business does not make a profit.
Why operating cash flow is important?
Operating cash flow (OCF) is cash generated from normal operations of a business. Operating cash flow is important because it provides the analyst insight into the health of the core business or operations of the company. Without a positive cash flow from operations a company cannot remain solvent in the long run.
What are the important things to remember when it comes to good cash flow management?
Cash Flow Management Tips
- 1) Keep Your Weather Eye Open.
- 2) Review Your Credit Policies and the Credit Histories of Customers And/Or Clients.
- 3) Take Action to Speed up Payment.
- 4) See if Payments to Suppliers Can Be Extended.
- 5) Renegotiate Contracts.
- 6) Use Cash Flow Management Tools.
How do you manage cash flow effectively?
To make sure you’ve got enough cash flow to keep your business running, follow these seven steps:
- Stay on top of bookkeeping.
- Generate cash flow statements.
- Analyze your cash flow.
- Figure out whether you need to increase cash flow.
- Cut spending where you need to.
- Speed up your accounts receivable.
- Rinse and repeat.
How do you manage personal cash flow?
Start new habits by following these six quick tips.
- Set ambitious, but realistic goals. The first step to building better cash flow is to visualise where you want to be financially.
- Pay yourself first.
- Review the flow of your money.
- Consider your costs versus income.
- Start budgeting.
- Get advice.
How do you free up cash flow?
10 Ways to Improve Cash Flow
- Lease, Don’t Buy.
- Offer Discounts for Early Payment.
- Conduct Customer Credit Checks.
- Form a Buying Cooperative.
- Improve Your Inventory.
- Send Invoices Out Immediately.
- Use Electronic Payments.
- Pay Suppliers Less.
How can personal cash flow be improved?
- Boost your income. Depending on your situation, bringing in more money may be easier than cutting back on expenses.
- Cut your expenses. While earning more income makes it easier to increase personal cash flow, it also makes it easier to spend more.
- Pay off debt.
- Refinance your debt.
- Plan for infrequent recurring expenses.
How do you do monthly cash flow?
Sample Cash Flow Statement
- Enter Your Beginning Balance. For the first month, start your projection with the actual amount of cash your business will have in your bank account.
- Estimate Cash Coming In. Fill in all amounts you expect to take in during the month.
- Estimate Cash Going Out.
- Subtract Outlays From Income.
What is a cash flow statement example?
The cash flow statement makes adjustments to the information recorded on your income statement, so you see your net cash flow—the precise amount of cash you have on hand for that time period. For example, depreciation is recorded as a monthly expense.
What is the net monthly cash flow?
Net cash flow is the difference between the money coming in and the money coming out of your business for a specific period.
What is monthly cash flow statement?
A cash flow statement shows the exact amount of a company’s cash inflows and outflows over a period of time. The income statement is the most common financial statement and shows a company’s revenues and total expenses, including noncash accounting, such as depreciation over a period of time.