Determinants and analysis of cash flows

Question 1

What are three measures of risk reduction?

Answer 1

Experience and history
Market Testing
Scenario Analysis

Question 2

Why are cash flows better to use compared to accounting earnings?

Answer 2

Earnings are uncertaig
Earnings are manipulable, while there is only one CF
Earnings to not attend the timing of receips and spendings

Question 3

What are incremental cash flows?

Answer 3

They show the difference between the firms CFs with or without the projects CFs

Question 4

What four things should you beware of regarding incremental CFs?

Answer 4

Overheads
Sunk costs
Opportunity costs
Side effects (ex cannibalisation, synergies)

Question 5

The planning horizon of a project should be decided by:

Answer 5

The shortest of these three:
Physical life of investment
technological life of investment
product life

Question 6

What are the two defining cash flows and how to determine them=

Answer 6

1 financial (monetary) CF = Cash receips - cash payments
2 Economic (real) CF = Revenues- Expenses

Question 7

Financial CF =

Answer 7

Economic CF - Investment in Working Capital

Question 8

How to determine the Economic CF in the income statement?

Answer 8

Economic CF = Operating Income = Revenues- Expenses

Question 9

Financial CF in the Cash flows statement:

Answer 9

Financial CF = Operating CF = Operating receipts - operating payments

Question 10

Net working capital =

Answer 10

Amount of funds that the company needs to finance its operating cycle.
inventories+
trade debtors -
trade creditors +

Question 11

Net Working Capital calculus =

Answer 11

Inventories period* Sales + Collection Period* Sales - Payables Period* Purchases

Question 12

What is the salvage value and how to calculate it?

Answer 12

= market value of the investment at the end of its useful life
Residual value = Market Value - Taxes
Taxes = Tax rate* (Market Value - Book value)
Book Value = Aquisition value - Depreciations and Amortizations

Question 13

What is the difference between FCFF (Free cash flow to the firm) and FCFE (Free Cash flows to equity)

Answer 13

FCFF = View point of the project
FCFE = Viewpoint of equity investors
FCFE = FCFF- (1-tax-tare)*Interests + Net borrowings

Question 14

Project cash flows are divided into:

Answer 14

Initial cost of investment
operating CF
Terminal and Ending value of project

Question 15

What is the most important rule regarding CF analysis?

Answer 15

Regard incremental CFs and therefore the difference between Cf with and without the investment.