Financial analysis usually is conducted using a cash flow model. The model projecting cash flows may be simple or very complex depending on the type and size of the project and the variables involved. Capital expenditure, revenues, expenses, terminal cash flow (if any), discount rate and general assumptions are used to calculate cash flow projections, which is the key element in financial analysis.
Since the financial feasibility of a project is assessed on the basis of proposed investments in, and projected cash flows from, the project, it is only prudent to assess the present value of future investments and cash flows to understand the net financial costs and benefits to stakeholders. Annexure 6A of this module sets out an indicative structure of the Financial Feasibility report.
| What is the Time Value of Money? Concept of Future Value • INR 100 is worth INR 100 today • What would it be worth a year from today • It would depend on how much it earns • If it earns 10 per cent per annum - it would be worth INR 110 i.e. 100 x (1+10%) a year from now • INR 110 is a future value (next year) of INR 100 • Two years from now this value would be 100 x (1.1) x (1.1) = INR 121 • 10 per cent is the compounding rate • 1.1 is the compound factor in year 1, 1.21 the compound factor in year 2 Concept of Present Value • INR 100 is worth INR 100 today • What would INR 100 received a year from now be worth today? • If the same rate of return is assumed • It would be INR 100/(1.1) = INR 90.91 today • INR 90.91 is the present value on INR 100 to be received a year from now • If INR 100 were to be received two years from now, its present value would be100/[(1.1) x (1.1)] = INR 82.64 • 10 per cent is called the discount rate • 0.9090 (1/1.1) is the discount factor for year 1 • 0.8264 (1/1.21) is the discount factor for year 2 |