Cash flow is the amount of money that a firm spends or receives from a project.
Cash flows are different from accounting profits.
- In revenues and profits, we find many accounting expenses or revenues that are not non-cash expenses but satisfy some accounting principles. Sometimes they comply with the spirit of the law (prudency principle, etc.), sometimes you find them only not to pay too much taxes. Ex: provisions (half of accounting frauds in France are found in that field)
For us the main difference between accounting and cash expenses is:
- when you buy a durable good (say a machine), in accounting you do not count it as an expense but as an investment. And you depreciate it. It may be ACRS: accelerated depreciation cost recovery
For CF, we have to taket into account these 3 parts
- we distinguish investment, additional working capital and operations
1. - investments and their residual value at the end of the period
2.- the increase of working capital (increases again in the first 3 or 4 years, decreases, then = 0). We take account of the change in working capital, not its amount
3.- additional revenues and expenses after tax (do not stop after some years, say 5, because you think that is too hazardous after. We need all the cf of the projects, even in many years. That's however true that the next years do not have a great impact on npv, because of the discount factor)
- the tax gain (depreciation tax shield): because with a new project, in the first years you have more expenses, so you pay less taxes. It is an opportunity gain. (only when the cf is negative)
ALSO
you can take account of inflation, but accounting does not do it (it might be a pb, because what you have in the balance sheet doesn't correspond to the reality anymore if it is 20 or 30 years of age)
The Net Present Value (NPV) rule and the internal rate of return >> |
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Corporate finance
The subject: corporate finance
PART ONE: CAPITAL EXPENDITURE
The present value
Investment
decisions
Practical
problems in capital budgeting
Firms evaluation
PART TWO. BASICS OF FINANCE
The financial
markets
Options
The market
efficiency
Risk
Mergers,
Acquisitions, and Corporate Control
International
Financial Management
PART THREE FINANCING DECISIONS
Corporate
financing
Dividend policy
and capital structure
PART FOUR FINANCIAL MANAGEMENT
Financial
planning
Short-term
financial management
Courses created and updated by Dr David Chelly, PhD in Management sciences from the University of Tours.
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