projectcashflows

Project cash flows are the sequence of cash inflows and outflows expected from a project over its life. They reflect actual cash movements, not accounting profits, and are used to assess financial viability and guide investment decisions. Inflows commonly include revenues, cost savings, salvage value, and changes in working capital; outflows include initial capital expenditure, operating costs, taxes, and financing payments.

Forecasting requires defining the time horizon and estimating timing and amounts of each flow. The initial investment occurs at project start; operating cash flows accrue periodically; working capital changes reflect funding needs; terminal cash flow captures residual value or decommissioning costs at the end.

Discounted cash flow methods are standard. Net present value compares the present value of inflows and outflows using a chosen discount rate such as the required return or cost of capital. Internal rate of return is the discount rate that makes NPV zero. Other metrics include the payback period and profitability index. Sensitivity and scenario analyses test how results respond to key assumptions.

Usage and limitations: cash-flow projections depend on uncertain forecasts and hinge on timing, prices, volumes, and costs. They should be complemented by risk assessment and qualitative factors, and considered alongside financing terms. In corporate finance, project cash flows underpin appraisal, budgeting, financing decisions, and performance measurement.