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Using Discounted Cash-Flow Analysis to Make investment Decisions - Calculating Cash Flow

4 important questions on Using Discounted Cash-Flow Analysis to Make investment Decisions - Calculating Cash Flow

What is the explanation of element 1: capital investment?

To get a project off the ground, a company typically needs to make considerable up-front investments in plant, equipment, research, marketing and so on. These expenditures are a negative cash flow – negative because cash goes out the door.

What are the 3 ways to deal with depreciation? - Element 2: operating cash flow

Method 1: Dollars in minus dollars out
Method 2: Adjusted accounting profits
Method 3: Add back depreciation tax shield

What is the formula for method 1: Dollars in minus dollars out?

Operating cash flow = revenues - cash expenses - taxes

What is the explanation of element 3: changes in working capital?

An increase in working capital, like in plant and equipment is an investment and therefore implies a cash outflow. A decrease in working capital implies a cash inflow. The cash flow is measured by the change in working capital, not the level of working capital.