Explanatory notes for Cash Flow analysis
A preliminary financial analysis which indicates the potential economic gain from
successful implementation of the proposed project should be made using the Cash
Flow Analysis. For our purpose, we wish to know how the companies have analysed
the financial exposure and potential return that they expect from the proposed
project. What are the estimated investment cash flow and the projected earnings
cash flow? Can the companies reasonably cope with the peak and aggregate
investments that commercial success will entail?
A cash flow analysis of the proposed project is required in order to generate from it 3
main economic indicators that are essential in assessing the economic viability of the
project: The joint project's estimated Internal Rate of Return (IRR), Net Present Value
(NPV) and Payback Period (PBP). Please include in your proposal both the cash flow
analysis table (see below) and an analysis of the resulting values of the above
three economic indicators.
Set out hereunder are step-by-step instructions on how to prepare the cash flow
analysis, with reference to the accompanying chart, illustrating a sample project (see
NOTE: The cash flow analysis is an Excel spreadsheet and is available from
VISTECH as an e-mail attachment or it can be downloaded from VISTECH’s website.
The eight-year period used in the chart below is chosen to cover the development
phase (1 to 3 years) and sales growth to a peak, followed by a drop in sales as the
product becomes obsolete. It is important that the whole life-cycle of the product be
considered, since the concept of liquidating the venture in the last year is used in
calculating an Internal Rate of Return (IRR). Shortening of the period under review
can lead to results which are quite misleading. However, a period of eight years
should only be used if it is relevant for your particular case.
NOTE: In the cash flow table below and in the spreadsheet, the mandatory input cells
are highlighted in yello