GSOE9830 Chap.2 Building Net Cash Flow
Building Net Cash Flow
Net cash flow is cash received less cash spent during each period, and its timing is the foundation of project appraisal. This chapter builds revenue from physical drivers, places capital and operating costs in the years they occur, and includes working-capital recovery, salvage and closure at the end of economic life.
A signed timeline makes omissions visible and protects later NPV and IRR calculations from a hidden year shift. Every total should be traceable vertically to the component rows in its year and horizontally to a physical driver, unit amount and duration. Financing is kept outside project cash flow when the discount rate already represents financing, preventing double counting.
Terminal effects are recorded separately because disposal, closure and working-capital release may have different signs and tax treatments. The undiscounted sum is a construction check, not an acceptance rule, because later chapters still have to recognise the time value of money.
What this chapter covers
- 01
Cash received
- 02
Capital expenditure
- 03
Operating expenditure
- 04
Economic life
- 05
Terminal cash flow
- 06
Sign convention
Worked example · free
Build a signed project cash-flow timeline
- +1Time-zero cash flow is the $240,000 outlay with a negative sign.
- +1Years 1 and 2 each equal $96,000 less $18,000, or $78,000.
- +1Year 3 adds $30,000 disposal proceeds, giving $108,000.
- +1The undiscounted total is $24,000, pending valuation.
Key terms
- Net cash flow
- Cash received less cash spent during a defined period.
- Economic life
- The period over which an alternative creates relevant cash-flow differences.
- Terminal cash flow
- End-of-study receipts and payments such as salvage and closure.
- Working capital
- Cash tied up in operations and commonly recovered at project end.
Building Net Cash Flow FAQ
Why does cash-flow timing matter?
A dollar received later has a lower present value at a positive discount rate. Timing also affects liquidity, tax and the point when the project recovers its original investment.
Where does salvage value go?
Place salvage proceeds in the period when the asset is sold, usually the final year of the study. Show any related disposal tax separately if the question provides that rule.
Should financing interest enter project cash flow?
Normally not when the discount rate already reflects financing, because including interest in cash flow would count financing twice. Follow any explicit question instruction that uses a different convention.
Exam move
Practise cash-flow construction from a blank timeline rather than copying a completed table. Draw time zero and every operating year, state whether amounts occur at the beginning or end of each period, and write the sign convention above the columns. Add component rows for production, price, revenue, capital expenditure, operating expenditure, working capital, tax and terminal effects.
Build revenue from quantity multiplied by price so a later sensitivity test can change either driver without replacing a hard-coded total. Place capital expenditure when construction or purchase occurs, not when depreciation begins. Put recurring operating costs only in periods that use the resources.
Keep financing payments outside project cash flow when the discount rate already represents financing, unless the problem explicitly asks for an equity viewpoint. Reconcile each year vertically. The net cash flow must equal receipts less every payment in that column. Reconcile each component horizontally by checking quantity, unit amount, escalation and duration.
These two directions expose different errors: a vertical mismatch reveals an omitted subtraction, while a horizontal mismatch often reveals a year shift or repeated amount. Add working capital deliberately. An initial commitment is an outflow, later increases are further outflows, and recovery is an inflow only to the extent recovered. Do not call the recovery profit.
Treat salvage, decommissioning and closure as separate terminal items because they can have opposite signs and different tax effects. Check economic life before stopping the timeline. The last year should contain every consequence caused by ending the project, including disposal receipts, closure payments and released working capital.
If an item continues after operating revenue stops, extend the boundary or explain why it is outside the stated study. Use a sign audit after the schedule is complete. Read each row aloud as received or spent and confirm the printed sign matches. Then sum undiscounted cash flow only as a construction check; do not use a positive total as proof of economic acceptability. Discounting still has to recognise timing.
Redo the same schedule with one changed assumption, such as delayed commissioning, partial working-capital recovery or a closure cost instead of salvage. Observe which columns move and which remain fixed. This is better preparation than memorising one finished layout because exam numbers can change while the construction logic remains stable.
Keep an error log for missing Year 0, wrong terminal year, double-counted capital cost, reversed cost sign, omitted working capital and financing included twice. Correct the schedule from the physical driver rather than patching the total. Before submitting an answer, point to every number in the net row and identify its source row. If a number cannot be traced, the model is not yet auditable.