Cash Flows: Important Principles

Estimate all cash flows on an incremental basis

Create a cash flow timeline, A, for the firm without the project.
Create a cash flow timeline, B, for the firm with the project.
The project value is the incremental cash flows generated i.e. cash flows of B-A.

Do not forget the importance of year 0 and the last year of the chosen timeline for the project

In year 0, Capital Expenditures and Working Capital will be incurred.
Working Capital typically includes Cash, Inventory, AR and AP
At the end of the project, there's terminal value or sale of inventory.

Account Issues are Important

Depreciation is the main issue because it's made up - And similar non-cash items.
Capital: a) Capex and b) Working Capital - Think about changes.

Do not mix financing with operations

Stay on the asset side. Value is generated on the asset side.
When you are doing project analysis, don't worry about financing for two reasons:

1. Money is generated by your ideas, not by financing
2. When you are discounting your cash flow, you are taking financing into account
3. Your ideas generate cash flows and financing just divides up the cash flows

Include effects of inflation/deflation

When projecting prices, take into account inflation or deflation.
Inflation is always in the discount rate, r.

Do not compare projects with unequal lives