Project Cash Flows

To develop the cash flows from a project, we need to recall (from Chapter 2) that cash flow from assets has three components: operating cash flow, capital spending, and changes in net working capital. To evaluate a project, or minifirm, we need to arrive at estimates for each of these.

Once we have estimates of the components of cash flow, we will calculate cash flow for our minifirm just as we did in Chapter 2 for an entire firm:

Project cash flow = Project operating cash flow

- Project change in net working capital

- Project capital spending

We consider these components next.

Project Operating Cash Flow To determine the operating cash flow associated with a project, we first need to recall the definition of operating cash flow:

Operating cash flow = Earnings before interest and taxes + Depreciation

- Taxes

To illustrate the calculation of operating cash flow, we will use the projected information from the shark attractant project. For ease of reference, Table 10.3 repeats the income statement in more abbreviated form.

Given the income statement in Table 10.3, calculating the operating cash flow is very straightforward. As we see in Table 10.4, projected operating cash flow for the shark attractant project is $51,780.

Project Net Working Capital and Capital Spending We next need to take care of the fixed asset and net working capital requirements. Based on our balance sheets, we know that the firm must spend $90,000 up front for fixed assets and invest an additional

318 PART FOUR Capital Budgeting

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