Cash Flows

Cash flows (as defined, as incremental after-tax cash flows) can be recorded and illustrated on cash flow diagrams. 

When considering cash flows, relatively between  two mutually exclusive alternatives, care must be taken 

1. if tax life is more than economic life, 
2. on the depreciation methodology adopted, 
3. if there are gains or losses in disposal, and 
4. if expenditure is either expended or capitalized. 
5. carry-forward of losses of set-off against future income must be considered. 

If the cash flow of a new investment option is likely to cause changes in the cash-flow in the ongoing operations with an on-hand investment, the mutual effect must be considered as part of the incremental basis of analysis. If changes in overheads occur due to the investment decision, such changes must be considered. How to consider the effect of taxes and depreciation has been already illustrated. 

If there are likely to be any changes in the net working capital (i.e. current assets minus current liabilities), due to the investment proposal, this must be considered as part of the initial cash outlay. The recaptured amount of the work in capital at the end of the resurrect must be included in the cash inflow in the terminal year. The same applies to any scrap or salvage value recovered. Increases or decreases in working capital beyond the initial outlay should be considered as part of the cash outflow in the respective year. 

It will particularly be seen that income-expansion capital investment proposals require additional working capital, and cost-reduction capital investment projects help in "releasing out" of the existing working capital. Such increase or decrease should be accordingly added to or subtracted from  the initial cash outlay; and the opposite will be appropriately true at the termination of the project. 

Any tax benefits due to investment allowance for eligible assets should be considered, generally at the initial year (or zero time) (or, if so indicated, for a limited number of initial years). Investment allowance is granted to encourage capital investment in designated areas to initiate developmental activity and improve employment opportunities in those areas. Also, in the initial cash outlay should be included : cost of land, building, plant, equipment, etc. if then purchased (or allocated by deemed cost), installation cost of plant and equipment, and any costs of royalty, patents, etc.