exchange rate 3 Flashcards
the opportunity cost of the historical investments or all existing assets for
the “without” and “with” the project case.
further adjustments to account for the opportunity cost of
land, inventory, and the excess of accounts receivable over accounts payable in year t in order to derive the total amount of the net replacement value.
Land has an X like every other asset when it is used by a project. Even if the land is donated to the project by the government, it should be included as part of the
Y at a value that reflects the market value of land in the project area.
opportunity cost, investment cost
In most cases, the increase in the liquidation value of land (particularly in urban areas) has
nothing to do with the project under evaluation.
Real increases in land value usually come about because of
the investment being made in public sector infrastructure. It is important not to attribute the increase in the real value of land to any particular project to avoid introducing a bias toward land-intensive projects.
when the project either improves or causes damage to the land. In such cases the amount of the land improvement or deterioration should be added to or subtracted from the real value of the land
measured at the beginning of the project to determine the liquidation value of the land at the end of the project.
Alternatively, the opportunity cost of land can be reflected in the cash flow profile of the project by an
annual rental charge
the loan disbursement is X and the repayment of loan and interest payment are Y as the owner is looking to the Z after paying all debts and obligations.
cash inflow, cash outflow, net receipts
he analysis from a banker’s point of view, however, is not concerned with the financing but is looking to
determine the X of the project to all investors irrespective of debtors or shareholders
financial viability
Often both debt and equity financing come from the same source and the loans have been either explicitly or implicitly guaranteed by the X. We will therefore begin our development of the financial cash flows of this project by making Y between the return received by the lenders of debt and that received by the equity holders.
government, no distinction
Interest during construction
accounting device to measure the opportunity cost of the funds employed in the project.
If no interest has been paid by the project, then interest during construction is
not cash expenditure and should not be included as expenditure in the cash flow statement of the project
if interest payments have been made during
the period of construction, then t
here is a cash outflow when the project is being examined from the viewpoint of the owner
Like investment expenditures,
operating expenditures should be broken down into
internationally traded and non-traded items;
These breakdowns are necessary for the
economic analysis of the project and for providing
a better understanding of the cost structure of the operating expenditures.
each expenditure item should be broken down into its components, X. For example, maintenance expenditures should be broken down into Y and Z.
whenever possible
materials
labor
Typically projects forecast their sales as a single
line item which
comprises both credit and cash transactions
A distinction must be made between X and Y. When a project makes a sale, the good or service may be delivered to the customer but no money transferred from the customer to the project.
sales
cash receipts
Until the buyer has paid for what he has received, the
transaction will have no impact on the cash flow statement. When the buyer pays for the items that he previously bought from the project, the project’s accountants will record a decrease in X by the amount that the buyer has paid and an increase in cash
receipts.
accounts receivable
The cash receipts for any period can be calculated as follows:
Cash receipts for period (inflow) = Sales for period + Accounts receivable at beginning of period - (Accounts receivable at end of period + bad debs during the period).
Accounts receivable are typically measured as X. It is important to ensure that the accounts receivable selected for the project are consistent with the current
performance of Y. Also important is to assess the likelihood for Z and to make allowances for them.
percentage of sales
industry standards
bad debts
Bad debts occur when
a project’s customers default on their payments. They simultaneously reduce the amount of cash inflows to the project and reduce the amount of accounts receivable at the end of the period
Similar to the distinction between sales and receipts, a distinction is necessary between the X made by the project and its Y. The value of the transaction will
be recorded in the cash flow statement only when and to the degree that cash is paid.
purchases
cash expenditures
Cash expenditures for period (outflow)
Cash expenditures for period (outflow) = Purchases for period + Accounts Payable at beginning of period - Accounts Payable at end of period
if the required stock of cash balances to be held to carry out transactions increases in a period, this increase is recorded cash X. On the other hand, if cash balances decrease, this decrease is a cash Y
outflow
inflow
a decrease in cash held for transaction purposes is a source of cash for other uses by the project and thus is a
cash
inflow
At the end of the project, any cash set aside will ultimately be X to the project as a cash inflow.
released back
The amount of cash to be held for facilitating the transactions of the business is typically a:
percentage of the project’s expenditures, sales, or its pattern of debt service obligations.
working capital
In order to carry out an economic activity, a certain amount of investment has to be made in
items that facilitate the conduct of transactions. These items are working capital
working capital including
cash, accounts receivable, accounts payable, prepaid expenses, and inventories.
A decrease in final good inventories implies an X in cash receipts or accounts receivable.
increase
A decrease in final good inventories implies that a sale has occurred
Changes in inventories are not recorded separately in the cash flow statement. When a project purchases a certain amount of raw materials, inventories of raw materials will increase. These inventories are financed either through a cash outflow and/or an
increase in accounts payable
comparing the amount of working capital estimated as a proportion of
total assets of the project to the industry average or with similar businesses that are operating successfully.
The payment made to the government, if the firm is taxable, is the difference between the
value-added taxes collected on the sales and the value-added taxes paid on the purchase of inputs.
In this case, there will not be an additional line item reporting the VAT payment to the government.
When a project produces an output that is exempt from VAT it will not be charging VAT when it sells its output. On the other hand, in most circumstances, it will continue to pay VAT on its purchases of inputs
negative tax payment or a refund of taxes paid. That should be reported as a negative cost or a cash inflow to the project.
The third possible situation occurs when the output of the project is expected with a rate of zero imposed on the export sales. In this case, no tax is included in the sales revenues or cash inflows. The VAT will be levied and included in the inputs purchased by the project.
the span of the analysis will not extend as far in the future as the project may be expected to operate
railway projects
Then the residual value of the asset should be included in the cash flow statement as an inflow in the year following the
cessation of operations.
The in-use value of the plant is the value of the plant under the assumption that it will
continue to operate as an on-going concern
The liquidation value is the value of the assets if
all components of the project are sold separately and perhaps even the plant is taken apart and sold.
While dealing with the in-use and liquidation in the future, general guidelines are to use the
cumulative economic depreciation over years
Thus, the residual value of land should be generally the same as its real price
at the start of the project
Real prices are determined by X while inflation is usually determined by the Y.
changes in the market demand and/or supply for the specific items.
growth of the country’s money supply relative to its production of goods and services.
