# Cash flow statement,project value, net present value etc in a contracting system

#### Srinivasan

Prime CE
Cash Flow
Cash flow refers to a contractors income and out go of cash. The net cash flow is the difference between disbursement and the income over a period of a time. A positive cash flow indicates that cash income is exceeding disbursement and a negative cash flow signifies just the opposite. And the contractor must maintain a cash balance sufficient to meet pay rolls, pay for materials, make equipment payments, and satisfy other financial obligations as they become due.

PROJECT CASH FLOWS

Cash Flow Stream –
Basic Components Initial Investment
Operating Cash Flows Terminal Cash Flow

Cash forecast:

A Cash forecast is a schedule that summarizes the estimated cash receipts, estimated disbursement, and available cash balances for some period into the future. The preparation of the cash forecast begins with the collection of detailed information regarding future cash income and expenditures.

APPRAISAL (DECISION MAKING) CRITERIA

Evaluating Project‘s Financial Feasibility Two broad categories

1. Non discounting criteria
Pay Back Period Average Rate of Return

2. Discounting criteria
Net Present Value - NPV
Internal Rate of Return - IRR

PRESENT VALUE [PV]
Present Value of a Single amount: PV = Fn[ 1/(1+r)]n

Where,
P = Present Value
F = Future Value
r= Discount rate per period
n = Number of periods

Present Value of a Cash Flow Stream n

PVn = Ct_t=0 ( 1+r)t

PVn = Present Value of a Cash Flow stream ,
Ct= Cash Flow occurring at time t
r= Discount rate,n= Duration of Cash Flow stream

NET PRESENT VALUE - NPV
Sum of the Present Value of all expected Cash flows [inflows as well as outflows] associated with an investment / project, taken one year at a time and discounted by a factor which represents the opportunity cost of capital.

NPV = Ct, t=0 (1+r) t

Where,

Ct = Cash Flow occurring at the end of year t, t = 0....n)

[A cash inflow will have a positive sign, whereas a cash outflow has a negative sign]

n = Life of the project
r = Rate of Discount

INTERNAL RATE OF RETURN [IRR]

The discount rate which results in NPV = O It is the discount rate in the equation

n

Ct__ = 0 (NPV)

t=1 ( 1+r)t

Where

Ct = Cash flow at the end of year t

r = Internal Rate of Return [Discount rate]
n = Life of the project

ACCEPT, IF NPV IS POSITIVE

REJECT, IF NPV IS NEGATIVE

INDIFFEENT , IF NPV IS ZERO

Computer Usage:

The computer is invaluable and indispensable element in the conduct of a successful construction business.
Areas of computer usage:

1. Financial accounting: The computer performs basic accounting functions such as accounts receivable, accounts payable, general ledger, inventory, cash forecast, financial statements, subcontractor control.
2. Equipment accounting: Computer maintains records of equipment depreciation, ownership and operating costs, hours of operation, maintenance, spare parts, production rates and units costs.
3. Payroll: Using time card input, the computer prepares payroll checks, periodic and special payroll and tax reports, the payroll register, and updates the employee master files.
4. Purchasing: The computer participates in the tabulation and handing of bits, purchase order preparation, expediting and shop drawings.

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