Basic methods for assessing net cash flow

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Effective management of the company's financial flows is impossible without a detailed analysis of the net cash flow. It reflects the real liquidity of the company, determining its ability to fulfill obligations, invest in development and maintain stable functioning. The choice of the evaluation method plays a key role in making strategic decisions.

Discounted Cash Flow (DCF) Method
The Discounted Cash Flow (DCF) method is a key tool for estimating the present value of future financial receipts, taking into account the time value of money. This approach allows veterinary email list investors and analysts to determine the attractiveness of a project, taking into account the risk and potential return.

Advantages :

Taking into account the time value of money provides a realistic assessment of long-term projects.

Helps identify the most effective investment opportunities among alternatives.

Restrictions :

Dependent on the accuracy of projected cash flows, which may be difficult in innovative or volatile industries.

The choice of discount rate can be subjective and affect the final valuation.

Net Present Value (NPV) Method
The Net Present Value (NPV) method allows you to determine the difference between the sum of discounted cash flows and the initial investment using the net cash flow indicator. It helps to assess how much value a project adds to a company.

Key metric:

NPV >0: the project is considered financially attractive;

NPV <0: the project may result in losses and requires revision.

Example: A transportation company is considering investing in a fleet of electric trucks for freight transportation. The initial cost is RUB 10 million. The expected discounted cash flows over five years are RUB 12.5 million. Therefore, NPV = RUB 12.5 million - RUB 10 million = RUB 2.5 million, which indicates that the investment is worthwhile.

Advantages :

Provides a quantitative assessment of the project's profitability in current prices.

Helps compare projects with different investment volumes and payback periods.

Restrictions :

Requires reliable data to make forecasts, which can be difficult in volatile market conditions.

Does not take into account external factors such as regulatory changes or social impacts.

Investment Profitability Index (PI)
The Profitability Index (PI) is calculated as the ratio of the present value of future cash flows to the initial investment. This indicator evaluates the efficiency of using invested funds.

Key metric:

PI >1: the investment is considered profitable;

PI <1: the project may be ineffective.

Calculation example: entrepreneur Maria is choosing between two projects: opening an online platform for learning programming and launching a power tool rental service. For the platform, the PI is 1.3, for the rental service - 0.85. This indicates that the first project is more promising, since a return of 1.30 rubles is expected for each ruble invested.

In Russian practice, there are regulations governing the assessment of investment projects. Federal Law No. 39-FZ establishes the principles of investment activities related to capital investments. Methodological recommendations of the Ministry of Economic Development of the Russian Federation and Resolution of the Government of the Russian Federation No. 1470 define the standards and rules for conducting financial analysis, ensuring a unified approach and transparency of procedures.