Capital budgeting decision

INITIAL CASH FLOWS (YEAR 0)

These comprised of expenditures that are made before assets become operational. Initial cash flows include

I. Cost of assets (invoice value of assets)

II. Capitalized expenditure: this is the expenditure required to make the assets operational e.g. freight charges, insurance, installation cost.

III. Opportunity cost.

• Investment allowances or tax holidays
• changes in working capital

FORMAT OF COMPUTING INITIAL CASH FLOWS

Invoice value………………………………………………………….…..XX

Add: Capital expenditure

Transportation………………..……………XX

Insurance…………………………………..XX

Installation…………………………….……XX XX

Add: Increase in Working capital……………….XX

Opportunity cost………………………….…XX XX

Less: Decrease in working capital…………………………….…….…(XX)

Investment allowances.…………………………………..…..…..(XX)

Tax Holidays…………………………………………..……..…….(XX)

NET INITIAL CASH FLOW/OUTLAY……..……………..……….…….XX

• INTERMEDIATE CASH FLOW
• These are cash flows that the investor expects to generate after the initial out lay has been made. These cash inflows are expected from period 1 up to period n-1 of the useful life of the assets. For example an asset with about 5 years lifespan will have intermediate cash flows accruing from year 1 to 4. Intermediate cash flows are realized from operating an asset inform of adjusted net revenues earned and any cost savings made by investing in the assets. Intermediate cash flows include:
• .increase in sale revenue offsets by increased expenses
• .cost savings

3. Adjustments of depreciation and other tax shield

THE FORMAT

Revenue……………………………………………………….……….………....…………..XX

Less: Costs (without depreciation, interest & tax)………………………….………….…XX