Total Cash Flows
The total cash flows for each period is equal to the equation:
Equation
TCF = OCF – NCS – CNWC
TCF = Total Cash Flow
OCF = Operating Cash Flow
NCS = Net Capital Spending
CNWC = Change in Net Working Capital
Also, we have the below equations.
Equations
Operating Cash Flows = Revenues – Costs – Taxes
Net Capital Spending = Depreciation Charge + Change in Fixed Assets
Net Capital Spending = Depreciation Charge + Change in Fixed Assets
Fixed assets are long term investments such as land, equipment and buildings.
Net working capital is current assets – current liabilities.
Challenge
A machine is bought for $100,000 in period 0, and will produce $50,00 of profit for periods 1-5. What is the present value of this investment? Assume a discount of 5% and we aren’t using depreciation. The tax rate is also 0%.