Earnings before tax, depreciation & interest…………………………………..….XX Less: Interest………………………………………………………………………..…….…XX Earnings before tax and depreciation……………………….………………….....XX Less: Depreciation……………………………………………………………………....….XX Earnings before tax……………………………………………………………….…XX Less: Tax…………………………….……………………………………………….…...…XX Earnings after tax……………………………………………………….……..….….XX Add back: Depreciation……………………………………………………….…………...XX NET INTERMEDIATE CASH FLOWS………………………………………….…..….…XX TERMINAL CASH FLOWS - Scrap value\salvage value (net salvage value)
- Tax saving or tax expenses
Terminal cash flows =net cash flow in final year of project +net salvage value Investment appraisal is the evaluation of the collected data about the cash flows so as to determine its viability. Once the cash flow rate has been determined and information has been derived, that information should be subjected to farther analysis using relevant techniques of investment appraisal. - Where there is no formal analysis, rely on experience, rule of thumb and peer advice. These techniques are advantageous in that, they are quick and cheap, but they can be sometimes unreliable.
- Non-discount cash flows methods: the techniques ignore the time value of money. They do not discount future cash-flow when comparing inflows and outflows. They include payback period method, accounting rate of return method or average rates of return method.
- Discount cash flow methods: these take into account time value of money. Here future cash flows are discounted to their present worth. These methods include net present value (NPV), internal rate of return (IRR) and profitability index (benefit ratio).
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