Page 101 - DBP5043

MEASURING A PROJECT’S BENEFITS

AND COSTS (RELEVANT CASH FLOW)

The incremental cash flows that matter in determining a relevant cash
flow. Therefore, the cash flow associated with the proposed
investment projects should be considered first. Cash flow of an
investment project can be divided into three main types:

1. The initial outlay (IO)

2. Annual cash Flow after tax ( the differential cash flows over
the project’s life)

3. Terminal Cash Flow

Initial Investment (initial outlay)

Initial outlay also called initial investment refers to the immediate cash
outflows required by a company to start a project.

IO is the immediate cash outflow required by the company to start a
project. IO can be divided into two types:

1. The initial investment for the purchase of new assets

2. The initial investment for the purchase of new assets to replace
older assets.