The most important dot with the dynamic processes of the investment is that one concentrates exclusively upon differences in the expected future cash flows which are caused by the implementing of a project. All cash flows are immediately treated, no matter whether they come from the company, purchase or sales of pieces of equipment or whether they deal with investments in working capital or their amortisation. The opportunity costs and the time value of the money are tied to the monetary influx or monetary drain, not to his source.
One of the great challenges in the analysis is the regulation of those cash flows which are relevant for the decision-making. Relevant cash flows are expected future payments which differ according to the selected alternative. With Liftime care an alternative consists in replacing it with the new one. The relevant cash flows are the difference between the cash flows of both alternatives.
With investment projects, for example, by the purchase of a new machine, there are typically five main categories of cash flows:
- The beginning investment in the machine and the working capital
- the cash flow from the sales of the old machine
- periodically returning cash flows from the company
- the cash flow from the disposal of the new machine and the amortisation of the working capital
the effect of the steering wheels on the cash flows.
We would more exactly like to look at the first 4.