Question

CASH FLOW EXAMPLE 1. Company Y made the following business transactions in the last eight Eight years ago obtained 150000s credit and invested 2000005 to the - Paid-back the credit (loan) with three enf of year payments (700005 years: production of Product A each payment) Annual revenue of Product A 90000$/year Annual expence of Product A has started with 10000S and increased 2000Ş each year 4 years ago Company Y invested 25000$ to the machines of Product A and made a cost reduction 10000$/year Today Company Y received 350005 from selling a property of the company - For 25000S two years - Company Y is planning to sell the business later. Make the Cash Flow of Company Y from company's perspective. i- In tabular form, show the annual Cash inflows, Cash Outflows and Net Cash Flows in three different columns Draw the Cash Flow of Company Y and show annual Net Cash Flows on the diagram ii- -54-

Answer 1

Given are a set of cash inflows and outflows. We will first expand this inflows and outflows for the whole period and then calculate inflows, outflows and net cash flow

The calculation is shown below

Cash Outflows = Investment in the machine (one-time investment, eight years ago) + Loan payment ( 3 investments) + ( annual expense ( 10000 initially with an increment of 2000 each year) + Investment in machine improvement ( one-time investment, four years ago)

Cash Outflows = 200000 + 70000*8 + 10000 + 12000 + 14000 + 16000 + 18000 + 20000 + 22000 + 24000 +25000 = 571000

Cash Inflows = Credit ( one-time, eight years ago) + Revenue ( 90000 each year) + Cost reduction ( 10000 for last four years) + Income from sale ( one-time in the current year)

Cash Inflows = 150000 + 90000*8 + 10000*4 + 35000 = 945000

Net cash flows = Cash inflows - Cash outflows = 945000-571000 = 374000

We can also reduce the expense of the last four years by 10000 every year and remove the cost reduction from cash inflows component

-8 -6 -4 0 Total ear Cash Out Flows 200000 210000 1000012000 14000 1600018000 20000 2200024000 136000 25000 200000 8000082000840004100018000 20000 2200024000 571000 Invested in production in beginning2 Loan Payment 7000070000 70000 Annual expense of Product A Investment in machine (4 years ago) 25000 Total Cash Out Flows Cash In Flows Credit Revenue Cost Reduction Income from Sale Total Cash In Flows 150000 150000 9000090000 900009000090000 9000090000 90000 720000 10000100001000010000 40000 3500035000 150000 90000 900009000090000 100000 100000 100000 135000945000 Net Cash Flows -5000010 8000 6000 49000 8200080000 78000 111000374000

Stepwise explanation

1. The cash we invested is an inflow and the case we earned is an outflow. So first we identify which cash flow is inflow and which is outflow.

2. The loan credited is an inflow and it is incurred eight years ago so we identify it as inflow at -8 years. The investment in machine is outflow so we identified it in the outflow

3. The EMI for loans in three years is paid at the end of the years. So it is an outflow for three years in years -7, -6, and -5

4. Revenue is inflow and expense is outflow incurred every year

5. The investment in machine is outflow and cost reduction is the inflow

6. The amount received from selling the property is an inflow

7. The Sale of business is expected in future so no cash flow is identified in at present

We calculated total inflow in a year by adding the inflows each year. Similarly, we calculated the total outflow.

The net cash flow is calculated by subtracting total inflow from the outflow.