BENEFITS OF DOCUMENT
DESCRIPTION
Cash Flow Estimation and Risk Analysis
Finance Management
Lecture Outline
1. Incremental Cash Flow for a Project
2. What is the depreciation basis?
3. Why is it important to include inflation when estimating cash flows?
4. Cash Flows due to Investments in Net Operating Working Capital (NOWC)
5. What if you terminate a project before the asset is fully depreciated?
6. What is the project's MIRR?
7. What is the project's payback?
8. What does "risk" mean in capital budgeting?
9. Is risk analysis based on historical data or subjective judgment?
10. What three types of risk are relevant in capital budgeting?
11. How is each type of risk measured, and how do they relate to one another?
12. What is sensitivity analysis?
13. What is scenario analysis?
14. What is a simulation analysis?
The most important, but also the most difficult, step in capital budgeting is estimating project cash flows. Many variables are involved, and many individuals
and departments participate in the process.
Estimating cash flows:
1. Relevant cash flows
2. Working capital treatment
3. Inflation
Three types of risk are relevant in capital budgeting
1. Stand-alone risk
2. Corporate risk
3. Market (or beta) risk
Risk Analysis:
1. Sensitivity Analysis,
2. Scenario Analysis
3. Simulation Analysis
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Source: Best Practices in Business Case Development, Cash Flow Management PowerPoint Slides: Cash Flow Estimation and Risk Analysis (Finance Management) PowerPoint (PPT) Presentation, UJ Consulting
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