FIN 411
Calculating Cash Flows
It is helpful to think of a project’s cash flow as composed of three elements:
Total cash flow = cash flows from capital investments + operating cash flows + cash flows from changes in working capital
We will look at each of these components in turn.
Element 1: Capital Investment
To get a project off the ground, a company typically needs to make considerable up-front investments in plant, equipment, research,
marketing, and so on.
Element 2: Operating Cash Flow
The operating cash flow consists of revenues from the sale of the new product less the costs of production and any taxes:
Operating cash flow = revenues − costs – taxes
The revenues are expected to outweigh the costs, and therefore, operating cash flows are positive. Many investments do not result in
additional revenues; they are simply designed to reduce the costs of the company’s existing operations. The cost savings, therefore,
represent a positive contribution to net cash flow.
Element 3: Cash flows from Changes in Working Capital
Investment in working capital, just like investment in plant and equipment, represents a negative cash flow.
On the other hand, later in the life of a project, when inventories are sold off and accounts receivable are collected, the firm’s
investment in working capital is reduced as it converts these assets into cash.
In general: An increase in working capital is an investment and therefore implies a negative cash flow; a decrease in working capital
implies a positive cash flow.
The cash flow is measured by the change in working capital, not the level of working capital.
ACCTG 320
Qualitative Risk Analysis
Qualitative risk analysis involves identifying threats (or opportunities), how likely they are to happen, and the potential impacts if they do.
Unlike quantitative risk analysis, which applies numerical values and uses verifiable data, qualitative risk analysis operates in a more
generalised, “big-picture” space.
Qualitative Risk Analysis assesses the priority of identified risks using their relative probability or likelihood of occurrence, the
corresponding impact on project objectives if the risks occur, as well as other factors such as the time frame for response and the
organization’s risk tolerance associated with the project constraints of cost, schedule, scope and quality.
Qualitative analysis can be performed using following four methods:
Assess impact and likelihood of the identified risk
 The probability assessment involves estimating the likelihood of a risk occurring.
 The impact assessment estimates the effects of a risk event on a project objective. These impacts can be both opportunities and
threats.
Probability and Impact Matrix
 It uses the combination of probability and impact scores of individual risks and ranks/ prioritizes them for easy handling of the
risks.
 In other words, the probability and impact matrix helps to determine which risks need detailed risk response plan.
Risk categorization
 Risk categorization, is the organization of risks based on their sources, areas of the affected project and other useful categories in
order to determine the areas of the project that are the most exposed to the effects of risks or uncertainties.
Risk urgency assessment
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The risk urgency assessment is a project management process that reviews and determines the timing of actions that need to
happen sooner than the other risk items.
The purpose of this particular type of risk assessment is that it identifies the near term risks.