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Identify and discuss three cash flow analysis techniques
Identify and discuss three cash flow analysis techniques.
Expert Solution
The important three cash flow analysis techniques are the following:
- Present worth analysis
- Annual cash flow analysis
- Rate of return analysis
- Present worth analysis
This method is very popular because total future cost and revenues are converted into monetary units, which means complete future cash flows are transformed into present amounts at a particular rate of return.
- Annual cash flow analysis
The basic idea of annual cash flow analysis is to transform complete cash flows to equivalent uniform annual worth (EUAW). If there any cash flow irregularities then first calculate the present worth then EUAW can be calculated by using this present worth.
- Rate of return analysis
The rate of return analysis is the most commonly used technique and it equates the present value of cash outflows to the present value of its cash inflows. At the time of the final payment of the loan interest rate of the loan will be zero.
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