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Investment
Economics |
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-Show
Cash Flow
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It is often interesting to see the explicit
cash flow generated by a project. Different kinds of analysis
are also possible with the cash flow displayed. To construct
a cash flow, choose the Show Cash Flow item from the
menu. The dialog shown below accepts the parameters of the display.
The add-in produces a display on the
Excel worksheet whose upper-left corner is located at the cell
specified Cell box of the dialog. The address in this
box is the location of the cursor when the dialog is called,
but it may be changed. The display covers a number of cells
below and to the right on the worksheet, so care must be given
that data is not overwritten. The program issues a warning before
overwriting worksheet information.
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Three different types
of cash flows are possible: project, comparison and blank.
When the project option is selected, the names of all the projects
defined in the workbook are listed. Use the cursor to click
on the desired project.
Comparisons can also generate cash flows as described later.
The Blank option produces an empty form that can be filled
by the student. Clicking OK with E6 selected constructs the
worksheet display shown below. |
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The lower part of
the display shows the cash flow for E6 in each year, generated
from the component data in the project description. The net
cash flow is shown with black numbers indicating positive cash
flows and red numbers in parentheses indicating negative cash
flows. Although these numbers are computed from the project
definition, they can be changed to observe the effects of variations.
The cumulative column (Cum. Val.) is the accumulation of the
cash flow values and is computed with formulas. The net investment
column is also computed with formulas. |
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The top of the display
shows computed values and data associated with the cash flow.
Cells colored yellow hold formulas. Uncolored cells can be
changed. Only the MARR and the guess for the IRR can be changed
by the student.
Reading from the top we see the following computed values
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Title
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This is based on the project generating the
cash flow and should not be changed. |
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Analysis
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The second row of the display holds a function
that identifies the type of cash flow with respect to the
cumulative cash flow. The example is a Simple Investment characterized
by money first going out and then coming in. The cash flow
column has a single sign change. A series of negative values
(in this case only one) is followed by a one or more of
positive values. Other possibilities are Simple Loan,
where there is a single sign change from positive to negative
values, and Mixed Cash Flow, where the cash flow
changes sign more than once. |
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Payback
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This is the number of periods before the
first 0 crossing for the cumulative cash flow. For a simple
investment, it is the number of periods required for the
total revenues to equal the total investment. When the
value 0 is not obtained for a whole number of periods,
a fractional number of periods is computed by linear interpolation. |
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Minimum Period
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Some projects may start at negative times
to indicate advance preparation relative to some arbitrary
reference point (time 0). If the project has the first
cash flow at some time other than 0, this number will appear
here. |
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NPW(0)
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This is the net present worth of the cash
flow at time 0. It is computed with the Excel PW function. |
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IRR Guess
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This cell provides a starting point for the
IRR function that has been placed in the cell immediately
below. This is useful for mixed cash flows that may have
multiple IRR values. |
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IRR
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This is the internal rate of return of the
cash flow. It is computed with the IRR Excel function. |
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RIC
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(Not shown for this example)
This is the Return
on Invested Capital. For simple investments or loans it
is the same as the IRR. For mixed cash flows with more
than one solution for the IRR, the RIC has the advantage
of being unique. The RIC computation finds the interest
rate that makes the future value at the time of the last
cash flow equal to zero. When the RIC column is negative,
the value of the cash flow grows in the next period according
to the RIC rate. When it is positive it grows according
to the MARR. See the IRR/RIC page
for a more extensive discussion. Some cash flows do not
have a valid RIC. |
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