Financial_Managment - Essay Example

The other significant cash flows include the firm’s cash flows from operations. These are derived by first getting the revenues after multiplying the forecasted sales volume to the sales price. After getting the revenues, the variable costs for labor and variable costs for materials are subtracted the gross contribution margin is derived. By deducting the additional fixed costs for the project and the depreciation expenses with the absence of income taxes in the analysis is derived, the incremental profit which is also the incremental cash flow.

This incremental operating cash flow is significant in the latter analysis for getting the net present value and internal rate of return. The forecasted operating cash flows for the company are as follows: 1350000 in 2008, 1150000 in 2009, 1850000 in 2010, 1100000 in 2011, and 450000 in 2012. The last significant cash flow figure is the terminal cash flow which is comprised of the salvage value of the machinery as well as the recovery of working capital. The salvage value is derived getting the 10% of the purchase price of the machinery amounting to 425,000, which are the estimated selling price of the machinery after five years.

The recovery of the working capital at the end of the project amounts to 1350000 in 2012. The total cash flows are then computed according to the year when they occurred. After the significant cash flows are computed, the time value of money should be considered as regards the timing of the cash flow in order to assess the investment well. Because of the time value of money, we need to bring the total cash flows and get their present value using the 12% hurdle rate as discount factor. By getting the present value of the cash flows then deducting the initial investment, we get a net present value of 777,745.

The rule of thumb for getting the net present