Cash flows
A cash flow describes a real or virtual movement of money:
Cash flows are narrowly interconnected with the concepts of value, interest rate and liquidity. A cash flow that shall happen on a future day tN can be transformed into a cash flow of the same value in t0.
Cash flows are often transformed into measures that give information e.g. on a company's value and situation:
Cash flow notion is based loosely on cash flow statement accounting standards. the term is flexible and can refer to time intervals spanning over past-future. It can refer to the total of all flows involved or a subset of those flows. Subset terms include net cash flow, operating cash flow and free cash flow.
The (total) net cash flow of a company over a period (typically a quarter, half year, or a full year) is equal to the change in cash balance over this period: positive if the cash balance increases (more cash becomes available), negative if the cash balance decreases. The total net cash flow for a project is the sum of cash flows that are classified in three areas
so how to calculate operating cash flow of a project? OCF=incremental earnings+depreciation=( earning before interest and tax-tax)+depreciation=earning before interest and tax*( 1-tax rate)+ depreciation= ( revenue - cost of good sold- operating expense- depreciation)* (1-tax rate)+depreciation= ( Revenue - cost of good sold- operating expense)* (1-tax rate)+ depreciation* tax. By the way, depreciation*tax which locates at the end of the formula is called depreciation shield through which we can see that there is a negative relation between depreciation and cash flow.
The sum of the three component above will be the cash flow for a project.
And the cash flow for a company also include three parts:
The sum of the three components above will be the total cash flow of a company.
The net cash flow only provides a limited amount of information. Compare, for instance, the cash flows over three years of two companies:
Company B has a higher yearly cash flow. However, Company A is actually earning more cash by its core activities and has already spent 45M in long term investments, of which the revenues will only show up after three years.
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