Topic 5: CASH FLOW FOR INVESTMENT
ANALYSIS
Sound investment decisions should be based
on the NPV rule. This involves discounting cash
flows. However, estimating the cash flows is a
task due to:
1.) Uncertainty –
Events affecting investment opportunities
change rapidly and unexpectedly
2.) Accounting ambiguities –
Mostly accounting data forms the basis for
estimating cash flows. Accounting data results
from arbitrary assumptions, choices and
allocations.
,If care is not taken in properly adjusting the
accounting data, errors could be made in
estimating cash flows.
NB:
Cash flow estimation is the most crucial step
in investment analysis followed by
determination of the rate to be applied in
discounting the cash flows.
, Cash Flows Vs Profit
* Cash flow is the inflow and outflow of
cash.
It is cash, which a firm can invest, or pay to
creditors to discharge its obligations, or
distribute to shareholders as dividends. It is
simply the difference between cash received
and cash paid out.
* Cash flow is different from profit.
The following are the reasons why Cash flow is
not the same as profit:
1.) Changes in profits do not necessarily
mean changes in cash flows.
Some firms may experience cash shortages in
ANALYSIS
Sound investment decisions should be based
on the NPV rule. This involves discounting cash
flows. However, estimating the cash flows is a
task due to:
1.) Uncertainty –
Events affecting investment opportunities
change rapidly and unexpectedly
2.) Accounting ambiguities –
Mostly accounting data forms the basis for
estimating cash flows. Accounting data results
from arbitrary assumptions, choices and
allocations.
,If care is not taken in properly adjusting the
accounting data, errors could be made in
estimating cash flows.
NB:
Cash flow estimation is the most crucial step
in investment analysis followed by
determination of the rate to be applied in
discounting the cash flows.
, Cash Flows Vs Profit
* Cash flow is the inflow and outflow of
cash.
It is cash, which a firm can invest, or pay to
creditors to discharge its obligations, or
distribute to shareholders as dividends. It is
simply the difference between cash received
and cash paid out.
* Cash flow is different from profit.
The following are the reasons why Cash flow is
not the same as profit:
1.) Changes in profits do not necessarily
mean changes in cash flows.
Some firms may experience cash shortages in
