Introduction to Finance

TA B L E 1 7 . 6
A Project Income Statement
Project sales
(generally a cash inflow)
–Project costs
(generally a cash outflow)
–Depreciation
(a noncash expense)
EBIT = EBT
(earnings before interest and taxes, which also equals earnings before 
taxes as financing costs are ignored in cash flow analysis)
– Taxes
Net income
(a cash outflow)
TA B L E 1 7 . 5
Firm versus Project Statement of Cash Flows
Firm Versus Project 
Statement of Cash Flows
The Firm’s Cash Flow Statement
A Project’s Cash Flow Statement
Cash Flow from Operations
Net Income
+Depreciation
+Current sources
–Current uses
Cash Flow from Operations
Net Income
+Depreciation
+Current sources
–Current uses
Cash Flow from Investment Activities
–Change in gross fixed assets
–Change in investments
Cash Flow from Investment Activities
–Funds invested in the project’s fixed assets
Cash Flow from Financing Activities
–Dividends paid
+Net new bond issues
+Net new stock issues
Cash Flow from Financing Activities
Not applicable
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An exception to this rule is overseas projects. For internal fi nancing purposes or because of currency restraints, 
some cash may remain with the overseas subsidiary. In this case, an overseas project’s cash fl ows should include only 
the cash that is returned to the parent fi rm.
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C H A PT E R 1 7 Capital Budgeting Analysis
assets are $700 and current liabilities are $400; this means net working capital is $300. Cash 
comes into the fi rm if customers pay $200 of their accounts receivable. This reduces accounts 
receivable and current assets to $500 ($700 – $200 payment) and net working capital to $100 
($500 current assets – $400 current liabilities).
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Thus, net working capital decreases when 
there is a source, or infl ow, of operating cash to the fi rm. When we 
subtract
this 
negative
change in net working capital, it becomes a 
positive
addition to operating cash fl ow: 
− (−$200 change in net working capital) = +$200 change in operating cash fl ow
Conversely, suppose with $700 in current assets and $400 in current liabilities (and a 
net working capital of $700 – $400 = $300) we pay $150 in bills we owe to suppliers. As a 
result, cash fl ows out of the fi rm and accounts payable falls by $150, as does current liabil-
ities. The new value of current liabilities is $250 ($400 – $150), and the new value for net 
working capital is $700 – $250 = $450. Net working capital has risen $150, from $300 to 
$450. Thus, net working capital increases when there is a use, or outfl ow, of operating cash 
from the fi rm. When we subtract this increase in net working capital it becomes a 
reduction
to operating cash fl ow: 
− (+ $150 change in net working capital) = −$150 change in operating cash fl ow