CONTENT

• ELEMENTS OF CASH FLOW

• TIME VALUE OF MONEY

• CAPITAL INVESTMENT DECISION

• TYPES OF BUSINESS FIRMS

 ELEMENTS OF CASH FLOW

• INTRODUCTION

• ELEMENTS OF THE CASH FLOW

 INTRODUCTION
• IT IS AN ACCOUNTING TERM THAT REFERS TO THE
AMOUNTS OF CASH BEING RECEIVED AND SPENT BY A
BUSINESS DURING A PERIOD OF THE SOMETIMES TIED TO
A SPECIFIC PROJECT.

ELEMENTS OF THE CASH FLOW

STREAM
CASH INFLOWS
-CASH SALES
-RECEIPTS FROM TRADE
-SALE OF SPARE ASSETS
-INVESTMENT OF SHARE CAPITAL
-PERSONAL FUNDS INVESTED
-RECEIPTS OF BANK LOAN
-GOVERNMENTS GRANTS
RECEIPTS FROM FACTORING
-INCOME TAX VAT & CORPORATION
CASH OUTFLOWS
-PAYMENTS OF WAGES
& SALARIES
-PAYMENTS OF SUPPLIERS
BUYING EQUIPMENT
-INTEREST ON BANK LOAN
OR OVERDRAFT
-PAYMENTS OF LOANS
-PAYMENT OF DIVIDENDS
-PAYMENTS OF LEASING OR
HIRE PURCHASE RENTALS
TAX
 ELEMENTS OF THE CASH
FLOW STREAM
• A PROJECT WHICH INVOLVES CASH OUTFLOWS FOLLOWED BY
CASH INFLOWS COMPRISES OF THREE BASIC CONCEPTS. THEY ARE

• INITIAL INVESTMENT: INITIAL INVESTMENT IS THE AFTER TAX

CASH OUTLAY ON CAPITAL EXPENDITURE AND NET WORKING
CAPITAL WHEN THE PROJECT IS SET UP.

• OPERATING CASH INFLOWS: THE OPERATING CASH INFLOWS ARE

THE AFTER TAX CASH INFLOWS RESULTING FROM THE
OPERATIONS OF THE PROJECT DURING ITS ECONOMIC LIFE.

• TERMINAL CASH INFLOWS: THE TERMINAL CASH INFLOW IS THE

AFTER TAX CASH FLOW RESULTING FROM THE LIQUIDATION OF
THE PROJECT AT THE END OF ITS ECONOMIC LIFE.
TIME VALUE OF MONEY
• IT IS THE IDEA THAT MONEY AVAILABLE AT THE PRESENT TIME
IS WORTH MORE THAN THE SAME AMOUNT IN THE FUTURE
DUE TO ITS POTENTIAL EARNING CAPACITY.

• TMV IS ASLO REFERRED TO AS PRESENT DISCOUNTED VALUE

• TIME VALUE OF MONEY FORMULA

• FV= PV*(1+(i/n))^(n*t)

• WHERE, FV= FUTURE VALUE OF MONEY, PV= PRESENT VALUE

ON MONEY, i= INTEREST RATE, n= NUMBER OF COMPOUNDING
PERIODS PER YEAR, t= NUMBER OF YEARS.
CAPITAL INVESTMENT
• CAPITAL INVESTMENT MAY ALSO REFER TO A FIRM’S
ACQUISITION OF CAPITAL ASSETS OR FIXED ASSETS SUCH
AS MANUFACTURING PLANTS AND MACHINERY THAT IS
EXPECTED TO BE PRODUCTIVE OVER MANY YEARS
 STEPS INVOLVED IN
CAPITAL INVESTMENT
• A PERFECTLY COMPETITIVE PROFIT MAXIMISING
FIRM WILL KEEP INVESTING IN NEW CAPITAL UP TO
THE POINT AT WHICH THE EXPECTED RATE OF
RETURN IS EQUAL TO THE INTEREST RATE.

• THIS IS ANALOGOUS TO THE SAYING THAT THE FIRM

WILL CONTINUE INVESTING UPTO THE POINT AT
WHICH THE MARGINAL REVENUE PRODUCT OF
CAPITAL IS EQUAL TO THE PRICE OF THE CAPITAL.

• MRPk=Pk
 BUSINESS FIRMS
BUSINESS FIRMS Why Do Business Firms Exist?

A business firm is an organization that uses resources to

produce goods and services that are sold to consumers,
other firms, or the government. Most businesses exist
because a group of people working together can be more
effective than a group of people working individually.
TYPES OF BUSINESS FIRMS

• SOLE PROPRIETORSHIP

• PARTNERSHIP

• CORPORATION

• FRANCHISE
1)SOLE PROPRIETORSHIP
 A sole proprietorship is a business that is owned by one
individual. This owner makes all the business decisions
,receives all the profits or losses of the firm , and is legally
responsible for the debts of the firm.

2) PARTNERSHIP
 A partnership is a business that is owned by two or more co-
owners , called partners.  The partners share profits and are legally
responsible for debts.
3) CORPORATION
 The corporation is a business type familiar to most people .A corporation
is a legal entity that can conduct business in its own name in the same way
that an individual does.

• A corporation is owned by its stockholders. Stockholders are people who

buy shares of stock in a
corporation.

• A share of stock represents a claim on the assets of a corporation. Assets

are anything of value to which the firm has a legal claim.
4) THE FRANCHISE

• A franchise is a contract that lets a person or a group use a firm’s name

and sell the firm’s goods in exchange for
certain payments and requirements. A famous example is the franchises of
the McDonald’s Corporation.