Cash Flow Estimates
For Capital budgeting cash flows have to he estimated. There are certain ingredients of cash flow streams.
Tax Effect It has been already observed that cash flows to be considered for purposes of capital budgeting are net of taxes. Special consideration needs to be given to tax effects on cash flows if the Finn is incurring losses and, therefore, paying no taxes. Tile tax laws permit carrying losses forward to be set of against future income. In such cases, therefore, the benefits of tax savings would accrue in future years
Effect on Other Projects. Cash now effects of the project under consideration, if it is not economically independent, on other LexisNexis projects of the Finn must be taken into consideration. For instance. if a company is considering -the production of a new product which competes with the existing products in the product line. it is likely that as a result of the new proposal. the cash flows related to the old product will be affected. Assume that there is a decline of R~5,000 in the actual now from the existing product. This should be taken into consideration while estimating the cash streams from the new proposal. In operational terms, the cash flow from the new product should be reduced by Rs 5,000. This is in conformity with the general rule of the incremental cash flows which involves identifying changes in cash flows as a’ result of undertaking the project being evaluated. Clearly, the cash flow effects of the project should not be evaluated in isolation, if it affects other projects in any way.