FLUJO DE FONDOS DE UN PROYECTO: ECONOMICO Y FINANCIERO - PARTE I

Introduction to Cash Flow Analysis in Projects

Overview of the Topic

• Jorge del Castillo Cordero introduces the topic of cash flow preparation for projects, focusing on both economic and financial perspectives.

• The discussion is based on a case study developed in Excel 2016, addressing common confusions among clients seeking project evaluation assistance.

Reference Authors

• Cordero references two Peruvian authors: Sergio Bravorellana, known for his book "Metodología de Evaluación de Inmersiones," and Paulira Briceño, author of "Evaluación de Proyectos."

• These references are crucial for understanding methodologies in economic and financial evaluations.

Economic vs. Financial Evaluation

Key Differences Explained

• Economic evaluation typically excludes debt effects, focusing solely on cash flows without considering financing costs.

• Financial evaluation incorporates both economic cash flows and debt impacts, resulting in distinct financial metrics.

Cash Flow Definitions

• The economic cash flow (or free cash flow) operates without debt considerations; it is essential for calculating Net Present Value (NPV).

• The financial cash flow includes all debt components and is used to assess shareholder returns.

Case Study Setup

Project Details

• A project with an investment of 100,000 soles over three years will be financed 40% through loans at an annual effective rate of 10%.

• Investment structure: 80% allocated to fixed assets and 20% to working capital; working capital is necessary before operations commence.

Operational Assumptions

• The project's operational profit before depreciation is estimated at 110,000 soles; fixed assets have a four-year lifespan.

• At the end of year three, remaining assets can be sold for 25,000 soles; tax rate set at 30%, excluding VAT effects.

Objectives and Methodology

Goals of the Analysis

• The aim is to calculate various project evaluation indicators from both economic and financial perspectives.

• Indicators include NPV (economic), IRR (economic), benefit-cost ratio (economic), as well as their financial counterparts.

Excel Application Process

• Cordero emphasizes using an Excel model that viewers can download to follow along with calculations step-by-step.

Steps in Cash Flow Calculation

Initial Calculations

• Depreciation will be calculated linearly based on asset value divided by its useful life; only fixed assets are depreciated.

Example Calculation:

• For a fixed asset valued at 80,000 soles with a four-year lifespan, annual depreciation amounts to 20,000 soles.

This structured approach provides clarity on how to analyze project viability through detailed cash flow assessments while utilizing practical tools like Excel.

Importance of the Income Statement in Tax Calculation

Overview of Financial Statements

• The income statement is crucial as it directly influences tax payments. It is recommended to prepare the income statement before cash flow statements for accurate financial analysis.

Understanding Operating Profit

• Operating profit reflects the company's earnings before interest and taxes (EBIT). Depreciation is recorded as an expense, impacting this figure negatively.

Sale of Equipment and Its Implications

Recording Equipment Sales

• The sale of equipment generates revenue, which must be accurately recorded. For instance, if equipment sells for $25,000, this amount needs to be documented properly.

Book Value Calculation

• To determine the book value at sale, subtract accumulated depreciation from the initial asset value ($80,000 - accumulated depreciation over 3 years = $20,000). This calculation is essential for understanding taxable gains.

Tax Implications of Asset Sales

Impact on Taxes

• Selling an asset above its book value results in a taxable gain; thus selling for $25,000 when the book value is $20,000 increases tax liability due to higher reported profits. If sold at book value ($20,000), no additional taxes would apply.

Calculating Income Before Taxes

Simple Tax Calculation Methodology

• The pre-tax income can be calculated easily by multiplying taxable gains by the tax rate (30%). This straightforward approach aids in estimating tax obligations based on operational performance.

Free Cash Flow Calculation Process

Steps to Determine Free Cash Flow

• Begin with net income from previous years and adjust for taxes paid to derive free cash flow or economic cash flow effectively using a simplified method that includes operational adjustments and capital recovery considerations.

Role of Depreciation in Cash Flow Analysis

Adding Back Depreciation

• Since depreciation does not involve actual cash outflow but affects accounting profits negatively, it should be added back when calculating operating cash flows (NOPAT). This adjustment provides a clearer picture of available funds generated by operations.

Investments and Working Capital Recovery

Accounting for Investments

• Investments in fixed assets are recorded as negative entries since they represent cash outflows while recovering working capital should also be factored into future projections positively as it represents incoming funds over time.

Weighted Average Cost of Capital (WACC)

Importance of WACC in Financial Analysis

• WACC serves as a critical discount rate used in evaluating project indicators such as NPV and IRR; it incorporates debt percentage and equity costs adjusted for tax effects to provide a comprehensive view of financing costs associated with projects.

Evaluating Project Indicators: NPV and IRR

Calculating Economic NPV

• Using WACC allows analysts to compute economic NPV effectively; positive values indicate potential profitability after covering initial investments—essentially reflecting economic benefits derived from projects undertaken today compared against future returns.

Understanding Internal Rate of Return (IRR)

• IRR indicates the project's expected return rate; achieving rates significantly above WACC suggests favorable investment conditions—critical for decision-making regarding project viability based on anticipated financial performance metrics like TIR being notably high at 73%.

Benefit-Cost Ratio Evaluation

Analyzing Investment Efficiency

• The benefit-cost ratio assesses how much benefit is gained per unit invested; ratios exceeding one signify profitable investments—indicating that each sol invested yields substantial returns today relative to projected benefits from ongoing projects evaluated through discounted future cash flows.

Understanding Investment Recovery and Debt Capitalization

Investment Calculation and Accumulation

• The initial investment of 83,000 is equivalent to 75,454.55 today; the formula for net accumulated value remains unchanged.

• For this year, an additional amount is added to the previous total, demonstrating a cumulative approach to investment.

• The process continues by adding amounts from different years until the total investment recovery is calculated.

Timeframe for Investment Recovery

• Between Year 1 and Year 2, the investment recovery period totals approximately one year and five months (1.36 years).

• This timeframe indicates that economically recovering the investment will take about one year and five months.

Debt Financing Overview

• A debt amounting to 40% of the total investment (40,000 out of 100,000) needs to be financed.

• The debt will be capitalized over one year before repayments begin; thus it accumulates interest during this period.

Capitalizing Debt

• To capitalize the debt: use final value calculations with a 10% interest rate over one year without any payments initially.

• After one year, the capitalized debt increases from 40,000 to 44,000 due to accrued interest.

Payment Calculations

• Monthly payments are calculated using a payment function based on a repayment plan over three years at a rate of 10%.

• Equal monthly payments amounting to approximately 17,693 are established along with an analysis of amortization and interest.

Financial Cash Flow Analysis

Economic Cash Flow Integration

• The economic cash flow data is integrated into financial analyses for comprehensive evaluation.

• The effect of debt as income is recorded positively in cash flow statements; this includes both repayment effects and tax implications.

Tax Benefits from Interest Payments

• Interest payments create tax shields that reduce taxable income; these benefits must be incorporated into financial projections.

Final Cash Flows for Shareholders

• Final cash flows reflect what shareholders can expect after accounting for all expenses including taxes related to interest payments.

Evaluating Financial Metrics

Net Present Value (NPV)

• NPV calculations utilize shareholder discount rates set at 12%, contrasting with earlier economic evaluations at lower rates.

Comparison of Economic vs. Financial NPV

• Differences between economic NPV (lower discount rate at 10%) versus financial NPV highlight varying project valuations based on financing costs.

Internal Rate of Return (IRR)

IRR Calculation Process

• IRR calculations follow similar principles as NPV but focus on determining profitability thresholds based on projected cash flows.

Benefit-Cost Ratio Assessment

• The benefit-cost ratio indicates that for every sol invested by shareholders in this project yields returns of approximately 3.17 times their input.

Payback Period Analysis

Determining Payback Period

• Updated calculations show that payback occurs within one year and one month compared to previous estimates indicating longer recovery periods.

Conclusion on Investment Viability

• Overall analysis suggests quicker recovery options enhance attractiveness for investors while maintaining clarity in financial projections moving forward.