Cash Flows and NPV

Property, plant, & equipment

• Net PP&E = undepreciated part of historical PP&E cost
• Use tax depreciation schedules
  • Accelerated compared to straight line financial reporting

Net working capital

• Short-term assets minus short-term operating liabilities
  • Short-term is called “current”
• Inventory plus accounts receivable minus accounts payable

Invested capital

• Net PP&E plus net working capital
• Equals assets not financed by payables
• \(\Rightarrow\) financed by investors (shareholders and lenders)
• Example: Net PP&E = 100, current assets = 30, current liabilities = 10
  • Total assets = 130
  • Invested capital = 120

Project cash flows

• Cash flow = income minus change in invested capital
• Usual timing
  • Early years = negative cash flows (build up of capital)
  • Middle years = positive cash flows
  • End = either
    • Extra positive cash flow due to wind-down of working capital and salvage value of PP&E
    • Or maybe disposal and/or environmental clean-up costs

Example

Net present value