Cash flows of investment projects: analysis and valuation...

Cash flows of investment projects: analysis and evaluation

Relevant cash flows

The most important stage in the analysis of the investment project is the estimation of the projected cash flow, consisting (in the most general form) of two elements: the required investments (outflow of funds) and cash inflows minus current expenditures (inflow of funds).

In financial analysis, you need to carefully consider the distribution of cash flows over time. Accounting statements of profit and loss are not linked to cash flows and therefore do not reflect when the inflow or outflow of money occurs during the reporting period.

When designing a cash flow, the time value of money must be taken into account.

To compare the different cash flow values, a discounting mechanism is used, with which all the cash flow values ​​at various stages of the investment project implementation are brought to a certain moment, called the moment of reduction. Normally, the moment of reduction coincides with the beginning (or end) of the basic stage of the investment project, but this is not a prerequisite, and as a moment of reduction, any moment for which it is required to evaluate the effectiveness of the project can be chosen.

As noted above, the most important indicator of the effectiveness of the project is the net present value. The indicators of the net present value (NPV) and the internal rate of return (III) allow you to compare various investment projects among themselves in order to choose the most effective one. However, projects of comparable maturity, volumes of initial investment and relevant cash flows are subject to such comparison.

By relevant cash flows are those flows in which the flow with the minus Changes to the stream with the plus sign once. Relevant cash flows are typical for standard, typical and simplest investment projects, where during the stage of initial investment of capital, i.e. outflow of money, followed by long-term income, i.e. inflow of money.

The analysis of the cash flow of the investment project is not limited to the study of its structure. It is also important to identify the cash flow, to verify its relevance (irrelevance), which, in the final analysis, will simplify the procedure for selecting assessment indicators and selection criteria, as well as improve the comparability of various projects.

Classification of investment projects with relevant cash flows

1. Investment projects with constant income are characterized by one-off initial investments ensuring equal (or approximately equal) in the amount of cash receipts at regular intervals during a certain time interval. The interval can be determined in advance or do not have a finite time boundary. The flow of equivalent cash receipts at regular intervals is called a annuity.

Graphical representation of the cash flows of the project, which brings a constant income, is given in Fig. 5.4.

Investment projects with a constant income

Fig. 5.4. Investment projects with a constant income

As examples of projects of this top, you can bring the operation of real estate or land with the condition of maintaining a constant rental rate. Another example of such a project is the placement of capital in the form of a deposit to a bank for a fixed interest.

In some cases, projects related to the implementation of production or trading activities can also be described using this model. However, this implies that the financial performance of the company will remain unchanged for a long time, which is possible only in a stable economy and, as a rule, in markets where competition is close to perfect, and significant changes in the market share per participant, are not possible.

A characteristic feature of such projects is the need for one-time investments that create a long-term cash flow. The lifetime of such an influx can be quite large (for example, in the case of operation of real estate objects) or is not generally limited within the foreseeable event horizon (when leasing a land plot). Current expenditures are either practically absent or their volume is stable in absolute terms, which is illustrated by the uniformity of the inflow of cash.

The main indicator characterizing this project can be considered the profitability of the project ( ARR ), calculated on the basis of the total amount of initial investments (rather than on the basis of average capital).

The ARR indicator for this type of project has a simple and convenient interpretation: it is the equivalent of a deposit rate, which requires placing an amount equal to the amount of initial investments in order to receive a similar income.

In terms of determining the acceptability of a project for implementation, an important indicator is also the amount of initial investment required, which is often crucial in accepting or rejecting such a project. In addition, it is necessary to assess the market potential of the project, i.e. the possible term for maintaining a constant stream of income.

Such projects are advisable to implement in those cases where the decisive importance is not the prompt return of the invested funds, but the creation of reliable sources of income for a long period of time. An example of an investor interested in implementing an investment project of this kind are pension funds.

2. Investment projects with constantly increasing (or constantly decreasing) incomes. The structure of cash flows of projects with incomes increasing at a constant rate is very similar to the structure of cash flows of investment projects with constant incomes. As a rule, they contain a one-time initial investment of funds and their subsequent inflow for a sufficiently long period of time. The main difference is that the volume of cash receipts increases with a constant rate throughout the life of the project.

It should be noted that the rate of increase in revenues from the implementation of the project can have both a positive and negative value, i.e. incomes can either increase or decrease over time. At the same time for projects with the same amount of initial investment and the period of implementation, as well as equal arithmetic amounts of expected revenues, a project with negative growth rates is preferable, i.е. with evenly diminishing returns, since it allows you to get a higher income earlier, which means that you can reinvest the income. This corresponds to the theory of the value of money over time, according to which, with equal amounts of cash receipts and other equal conditions, the income received earlier is of great value, since it allows in turn to receive additional income from reinvestment of funds.

Graphical representation of the project's cash flow with constantly increasing incomes is shown in Fig. 5.5.

Project with increasing incomes

Fig. 5.5. Project with increasing incomes

Examples of such investment projects can serve as projects for the creation of production and trade enterprises, as well as enterprises of other types of business activity, but focused on expanding (or, conversely, reducing) the volume of activity over time. This model is extremely widespread and can be widely used to evaluate investment projects of enterprises of very different profiles.

The time during which the project generates revenue can be quite large, however, as a rule, it can be estimated. This is due to the fact that most projects related to production or trade have a certain lifetime, limited by the service life or the functional obsolescence of equipment or the need for reconstruction of the enterprise.

The current costs associated with such a project may increase in absolute terms as it is implemented, but often their percentage in percentage terms decreases, which leads to an increase in the growth rate of income from the project. It is possible that current expenses remain constant in percentage terms, and revenue growth is due to an increase in sales volumes.

3. Battery-type investment projects. The cash flows of battery-type projects are a series of successive investments, and the subsequent inflow, as a rule, is a one-time investment. In most cases, projects of this type have a certain period of existence, ending with the moment of inflow of funds. Sometimes the flow of initial investments consists of equal elements.

Graphical representation of the cash flows of a battery-type project with equal volumes of initial investments is shown in Fig. 5.6.

Battery type design

Fig. 5.6. Battery design

The main difference between projects of this type, as the name implies, is the ability to accumulate money for a long time with the purpose of their subsequent single extraction to generate income. In some cases, the revenue stream may extend to several planning intervals.

The most typical example is any construction project for the purpose of the subsequent sale of a real estate object, which allows to accumulate temporarily free cash assets of an enterprise with a view to the subsequent receipt of income from their reinvestment. In the financial sphere, an accumulation contribution can serve as an example of such a project.

The peculiarity of battery-type projects is that the expected profits and costs are accurately fixed at the time the project is launched, unlike, for example, projects aimed at expanding the scope of activities in the implementation process. In addition, the deadline for the project is also fixed.

Operating costs associated with the implementation of such a project, as a rule, are difficult to separate from investment. Temporary termination of the project requires the preservation of part of the conservation costs.

Projects of this type have become widespread among enterprises that do not have the opportunity to expand their activities within the basic profile, but who have temporarily free cash. Sometimes their implementation by such enterprises is described by a combination of the projects under consideration and the first type.

4. Investment projects of a speculative type. Speculative projects are a combination of two operations - expendable and profitable, occurring within a fairly short period of time.

A graphical representation of the cash flows of a speculative project is shown in Fig. 5.7.

Speculative-type project

Fig. 5.7. Speculative type project

As examples of such projects, one can cite trading operations, as well as speculative operations with securities, currency. This model is convenient to use first of all when evaluating intermediary transactions that do not involve significant investments in fixed assets.

A characteristic feature of such projects is a relatively short period of their implementation and the relative simplicity of the cash flow, which usually contains two elements - cash outflow and subsequent income.

Speculative-type projects can be of a single or repetitive nature. With multiple repetition, they can also provide for reinvestment of income, turning into incomes with a constant rate of income growth.

The key indicator for evaluating single projects is also the profitability indicator ( ARR ).

Sometimes, for convenience of comparison, the profitability of the project is recalculated into annual percentages:

where T is the duration of the project in days.

The payback period of investment projects of a speculative type is equal to the total duration of the project.

From the point of view of making a decision on the implementation of the project, it is also of great importance that the speculative project can be repeated and that the volume of operations can be expanded through reinvestment of capital. An additional measure of the estimation of recurring investment projects of a speculative type is the rate of capital turnover ():

The advantages of speculative projects are short implementation times, a simple investment cycle, as well as a short payback period, due to the complete withdrawal of capital at the end of the project. As a rule, speculative operations have high profitability. At the same time, projects of this type are accompanied, in most cases, by a high degree of risk caused by changes in the market situation.

The comparative characteristics of projects with relevant cash flows are presented in Table. 5.11.

Table 5.11. Comparative characteristics of projects with relevant cash flows


Type of investment project

With a constant income

With constantly increasing (decreasing) income

Rechargeable type

Speculative type

Timeline for implementation






Typically, a large

Typically, a large




Typically, one time

Typically, one time




Current costs






For a long time

For a long time

Typically, a single


Intermediate Withdrawal

In principle, it is possible

In principle, it is possible

Matched with loss

Key Performance Indicators

Purpose of the application

Creating a reliable source of revenue for a long time

Activity Orientation

Reinvesting funds temporarily released for some time

One-time reinvestment of funds (for single projects)

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