Cash Flow From Investing
The cash flow investment (FCI), is the change in capital from the difference between inflows and outflows of cash from investments in financial instruments, usually debt in the short term and easily convertible into cash , capital expenditures associated with Investments, purchase of machinery, buildings, investments, and acquisitions.
In order to build an investment project and calculate its cash flow, the following aspects must be taken into account:
- Stages of the investment project in which you want to calculate the cash flow.
- The information you want to get when evaluating the project.
- The objective that is pursued when investing resources.
The evaluation of a project seeks to determine the profitability of the investment in it, by determining the discount rate used to update cash flows.
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The evaluation of a project can be expressed in many different ways, in monetary units through net present value (NPV), as a cost-benefit ratio, as a percentage through the internal rate of return or IRR, or as a Calculation of how long it may take to recover the investment.
The two economic indicators most used by financial experts for the evaluation of an investment project are the NPV and the IRR.
The NPV is based on the fact that the value of money changes over time. With very small inflation, one dollar today can make buy less than one euro a year ago. The NPV allows us to know in today’s euro terms the total value of a project that will be spread over several months or years, and which can combine both positive and negative flows.
In turn, the NPV allows to decide if a project is profitable (NPV greater than 0), is not profitable (NPV less than 0) or indistinct (NPV = 0), based on the rate that has been taken as reference.
NPV> 0; profitable
VAN = 0; indifference
VAN <0; Unprofitable
On the other hand, the IRR determines the discount rate that makes the NPV of a project equal to zero and is expressed as a percentage. It is the maximum interest rate at which it is possible to borrow to finance the project without incurring losses.
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