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CFS C9TX: Project appraisal: cash flow and applications (are profit…
CFS C9TX: Project appraisal: cash flow and applications
introduction
Quality of information
relevance
completeness
consistency
accuracy
reliability
timeliness
low cost of collection compared with benefit to be gained by gathering more detail
are profit calculations useful for estimating project viability?
a. depreciation
b. working capital
i. cash floats
ii. stock (inventories)
iii. debtors
iv. creditors
c. net operating cash flow
i. an example of the differences between profit and cash flow
d. incremental cash flows
i. include all opportunity costs
ii. include all incidental effects
iii. ignore sunk costs
iv. be careful with overheads
e. dealing with interest
to repeat, interest should not be deducted from the net cash flows
the replacement decision
in making a replacement decision, the increased costs associated with the purchase and installation of the new machine have to be weighted against the savings from switching to the new method of production
replacement cycles
the annual equivalent annuity (AEA), lowest common multiple (LCM) method
when to introduce a new machine
drawbacks of the annual equivalent annuity method
timing of projects
the make or buy decision
fluctuating output
key points and concepts