Annual Cash Flow Research Articles

Risk Modeling for Future Cash Flow Using Skew t-Copula

In this article, we estimate future annual cash flow of an insurance company. Data of three main different business lines of the company are used to predict the next year's cash flow. The individual business lines are modelled by Gamma, Pareto and lognormal distributions. Daily payments were correlated and therefore the joint distribution of the business lines was found. As the model, the skew t-copula introduced in Kollo and Pettere (2010) was used. Simulation from the joint distribution was carried out to predict the next year's cash flow. The obtained results were compared with the case when the dependencies between the business lines were not taken into account. Presented model gives stochastic approach for future payments.

Mid-Year and End-of-Year Conventions in Achieving Convergence Among Discounted Cash Flow Models

In my paper, I have managed to achieve full convergence of the results of valuation executed by four methods (CCF, APV, DCF and CFE), provided that cash flow is generated throughout the year (Mid-Year Convention). I have shown that convergence among all methods can be achieved whether we use the End-of-Year Convention or Mid-Year Convention. I have demonstrated an analytical solution to the circularity problem in practice using the End-of-Year Convention proposed by Velez-Pareja and Mejia (2010). Based upon their solution to the circularity problem I propose a new, universal solution to achieving convergence among all methods on the condition that the Mid-Year Convention holds true. All four methods coincide with the APV and CCF methods, which are the best methods to calculate value without circularity. These two methods require neither target leverage nor iterations.One of the most significant findings of this paper is how the generally accepted Mid-Year Convention (the 0.5 time-factor) differs from the accurately calculated, proper Time-Factor for the FCF and CFE methods which has to be applied in order to achieve convergence among all four methods. I have proved scientifically that the generally accepted Mid-Year Convention (the 0.5 time factor or approximately 0.5) produces significant bias in the DCF and CFE methods which can materially distort the resulting values. Now I can soundly argue with many authors and some practitioners who state that annual cash flow with the generally accepted mid-year factor (0.5 or approximately 0.5) does not produce a material bias in the cash flows on a daily, weekly or monthly basis.

Daya prediksi laba dan aliran kas (Studi empiris pada perusahaan manufaktur di Bursa Efek Indonesia periode 2005-2009)

This study provides information on predictive ability of annual earnings and cash flow from operation numbers. We obtained a sample of 42 BEI (Bursa Efek Indonesia) listed companies and 168 observation, year-end firms from 2005 to 2009. We find that both cashflows and earn- ings numbers have substantially predictive ability for future cashflows. Furthermore, this study documents that cashflows numbers have more predictive ability for future cashflows than earn- ings and the result are robust. Keywords: Earnings, Earnings and Cashflows Prediction, Cashflow.

Factors Associated with the Year-End Decline in Working Capital

Working capital is an important indicator of firm operational efficiency. All else being equal, lower levels signal greater efficiency. Managers are thus likely to be motivated to report lower levels of working capital at times of greater external attention. We find that working capital levels decrease in the fourth fiscal quarter significantly more than expected, conditional on seasonal changes in economic activity. The decrease subsequently reverses in the following first fiscal quarter. Evidence indicates that firms manage down year-end working capital through transactions that increase year-end operating cash flow and that firms spread this activity over all working capital accounts. Finally, the temporary decrease in year-end working capital is correlated with compensation benchmarks and analysts’ annual cash flow forecasts. The temporary drop is also more pronounced for firms with industry dominance. This paper was accepted by Mary Barth, accounting.

ECONOMIC BENEFITS OF INTEGRATING A HYDROPONIC-LETTUCE SYSTEM INTO A BARRAMUNDI FISH PRODUCTION SYSTEM

The economic benefits of an aquaculture-hydroponic integrated system are evaluated using a hydroponic-lettuce and barramundi fish production system as a case study. Technical data were obtained for a case study farm located at Port Stephens, New South Wales, Australia. The net present values of annual cash flows over a 10-year planning horizon were determined for barramundi and lettuce production as stand-alone units, and alternatively as integrated units, using a capital budgeting framework. Integrated production enables barramundi effluent to be used as a source of nutrients for the lettuce production. This results in an increase in net benefits equal to the reduction in barramundi effluent disposal costs, and the saving of some water and nutrient costs of the lettuce system.

Capital budgeting decisions using the discounted cash flow method

To the Editor, The return on investment (ROI) method is commonly quoted in the analysis of capital investments affecting the practice of anesthesiology, such as the Anesthesia Information Management System (AIMS), handheld computer technology, and the Preoperative Evaluation Clinic. The ROI method is easy to compute and understand (Table 1). However, it measures risk rather than investment returns. The ROI method is biased against long-term projects and is based on an arbitrary, short-term cut-off date that ignores the investment’s performance after the cut-off point and disregards the possibility of growing cash flows after that point. For example, one cannot disregard the cost reductions and cost savings of an AIMS resulting from reductions in anesthetic-related drug costs and increases in hospital reimbursement occurring beyond a cut-off period. Expressing these future cash flows in terms of their value today is known as the discounted cash flow (DCF) method. The DCF method is superior to the ROI method for analyzing capital investment decisions because it incorporates the time value of money. The DCF method estimates the value of an investment’s projected future cash flows as if the cash flows were available today. It includes two main methods of discounting future cash flow. The discounted payback period rule includes the time value of money; however, like the ROI method, it is limited by an arbitrary short-term cut-off period that is biased against long-term investments. The net present value (NPV) method includes the time value of money and is a superior method for long-term projects, such as those commonly encountered in the practice of anesthesiology. The NPV method is a measure of financial value and one approach to assessing the profitability of a proposed investment. The calculation of NPV can result in one of three possible scenarios (Table 1). First, a NPV that is greater than zero adds monetary value to the organization. The capital budgeting process can be viewed as a search for investments with a positive NPV. From a financial standpoint, these projects should be undertaken because they add value. Second, a NPV that is less than zero would represent a loss of value to the organization if the investment were undertaken. From a financial standpoint, the investment should not be made. Third, a NPV that is equal to zero represents an indifference towards the project and the need to consider other non-monetary factors before proceeding with the investment. The NPV should not be used to the exclusion of other variables that influence capital investment decisions simply because it is superior to the ROI method. In clinical practice, many non-economic factors take precedence over capital investment calculations, including medical evidence, quality and safety, governmental regulations, incentives, penalties, and compliance requirements. Despite the NPV of the proposed investment, the improvement in a hospital’s welfare may exceed the expenditure on the project. In addition, the annual operating cash flow estimates that are based on D. R. Sinclair, MD (&) University of Miami, Miami, FL, USA e-mail: dsinclair@med.miami.edu Table 1 Summary of formulas and calculations

Rentabilité des plantations d’épinette blanche améliorée génétiquement au Québec : le point vue du propriétaire

One of the main issues facing the forest sector at present relates to striking a balance between the increasing demand for wood fibre and the need to maintain the sustainability of forest ecosystems. New approaches are needed to ensure more effective management of ecosystems and to implement intensive silviculture where possible to increase timber yields. To achieve this shift, we need to determine the economic potential of the various options available, including the use of biotechnology. This study was undertaken to estimate the benefits produced by genetically improved white spruce plantations, to determine the optimal economic rotation age for such plantations, and to evaluate the effect of certain factors such as the quality of reforestation sites, potential genetic gains from the use of biotechnology, and silvicultural regimes. Genetic gains are estimated in relation to 3 production approaches: 1) planting of seedlings obtained from seed orchards (10% height gain), 2) planting of multifamily varieties using cuttings from superior families obtained from controlled crosses (15% height gain) and 3) planting of multiclonal varieties produced through somatic embryogenesis and selected from seed orchards using genetic markers (20% height gain). The latter approach is still under development but is considered realistic. The present value of benefits (PVB) and the equivalent annual cash flow (EACF) criteria were used to estimate the benefits resulting from these genetically improved plantations and to determine the optimal economic rotation age. The analyses showed that the forest site quality has the greatest influence, followed by the factors representing productivity gains associated with genetic gain, and the silvicultural regime. Genetically improved stock can generate increases in PVB of up to 73% depending on the approach used to exploit the potential genetic gains. The results suggest that, to maximize profitability, improved stock should be used on the most productive sites and the plantations should be intensively managed. Key words: economic benefits, white spruce, genetic improvement, intensive silviculture, multiclonal varieties, optimal economic rotation age

Benefits of using genetically improved white spruce in Quebec: The forest landowner’s viewpoint

One of the main issues facing the forest sector at present relates to striking a balance between the increasing demand for wood fibre and the need to maintain the sustainability of forest ecosystems. New approaches are needed to ensure more effective management of ecosystems and to implement intensive silviculture where possible to increase timber yields. To achieve this shift, we need to determine the economic potential of the various options available, including the use of biotechnology. This study was undertaken to estimate the benefits produced by genetically improved white spruce plantations, to determine the optimal economic rotation age for such plantations, and to evaluate the effect of certain factors such as the quality of reforestation sites, potential genetic gains from the use of biotechnology, and silvicultural regimes. Genetic gains are estimated in relation to 3 production approaches: 1) planting of seedlings obtained from seed orchards (10% height gain), 2) planting of multifamily varieties using cuttings from superior families obtained from controlled crosses (15% height gain) and 3) planting of multiclonal varieties produced through somatic embryogenesis and selected from seed orchards using genetic markers (20% height gain). The latter approach is still under development but is considered realistic. The present value of benefits (PVB) and the equivalent annual cash flow (EACF) criteria were used to estimate the benefits resulting from these genetically improved plantations and to determine the optimal economic rotation age. The analyses showed that the forest site quality has the greatest influence, followed by the factors representing productivity gains associated with genetic gain, and the silvicultural regime. Genetically improved stock can generate increases in PVB of up to 73% depending on the approach used to exploit the potential genetic gains. The results suggest that, to maximize profitability, improved stock should be used on the most productive sites and the plantations should be intensively managed. Key words: economic benefits, white spruce, genetic improvement, intensive silviculture, multiclonal varieties, optimal economic rotation age

Which cost of debt should be used in forecasting cash flows?

Frequently, analysts and teachers use the capitalized rate of interest for the cost of debt when forecasting and discounting cash flows. Others estimate the interest payments when forecasting annual financial statements or cash flows based on the average of debt calculated with the beginning and ending balance. Others use the end of year convention that calculates the yearly interest multiplying the beginning balance times its contractual cost. The use of one or other methods is critical for the definition of the tax savings. These approaches are illustrated with examples and the differences in using them. A simple proposal to solve the problem is presented.

The Pitfalls of Capital Budgeting When Costs Correlate to Oil Price

Abstract This paper investigates the economic relationship that exists between oil price and operating costs in the E&P industry and its implications for the capital budgeting and decision-making processes. We present empirical evidence that there is a positive correlation between price and operating costs, and that overlooking this relationship has severe implications for the valuation of investment projects, both using a traditional Net Present Value (NPV) methodology or a Real Option approach. In the traditional NPV method, overlooking a price-cost correlation results in undervalued projects, and under Real Option Analysis, projects tend to be overvalued if such correlation is ignored. Introduction Any oil company manager involved in capital budgeting and decision-making is aware that the costs of exploration, appraisal, development and production have skyrocketed in the last five years due to increased demand for drilling rigs, specialized labor force and other resources. This dramatic change in costs is ultimately related to the increased activity in the E&P industry, reflecting the impacts of the rise in oil prices observed in the last number of years. This paper shows empirical evidence that the operating costs in the E&P industry are highly correlated to the price of oil. In the capital budgeting process, however, this correlation is often overlooked. When costs correlate to oil price, an increase or decrease in revenues is at least partially offset by a co-movement in costs. When this offsetting effect is ignored, the volatility of cash flow tends to be overestimated. This paper shows how this problem affects the valuation of oil prospects, both under the traditional NPV approach and a real option valuation technique, analyzing how decision-making processes may be flawed when the correlation between oil price, capital and operational expenditures are ignored. Under the traditional NPV approach, the overestimation of the volatility of cash flow causes projects to be seen as riskier than they really are. This causes a misperception of the firm's costs of financial distress. As a result, NPV is underestimated and, thus, the firm may pass over some good investment opportunities. If a real option approach is used, overestimated volatility results in an overvalued project since, as seen in the next section, the value of an E&P project is an increasing function of the volatility of its cash flows. This paper is structured as follows: the next section shows briefly how projects are evaluated under traditional NPV and real option approaches. Section 3 presents empirical evidence that costs correlate to oil prices. Section 4 discusses the differences between project valuation when a cost-price correlation is taken into account or not, including a numeric example. The last section brings some findings, conclusions and general implications of the results obtained for the decision-making process. Project Evaluation Under Traditional NPV and Real Option Approaches Valuation Using Traditional NPV The Net Present Value (NPV) of a project is given by the sum of annual cash flows yielded by the projects; each one discounted at a proper rate that reflects the systematic risks associated to these cash flows, i.e.:

Life Cycle Cost Analysis of a Hybrid Photovoltaic/Thermal Greenhouse Dryer

In this paper, life cycle cost analysis of a self sustained hybrid photovoltaic/thermal (PV/T) greenhouse dryer has been carried out. The hybrid PV/T integrated greenhouse (roof type even span) dryer, designed and constructed at So- lar Energy Park, Indian Institute of Technology, New Delhi (28 0 35 N, 77 0 12 E, 216 m above MSL), India, has been used to dry Thompson seedless grapes under forced mode of operation. The annualized cost method has been used to determine the pay back period of the hybrid PV/T greenhouse dryer. The payback period is about 1.24 to 4.63 years which is lower than the expected life of the dryer i.e. about 30 years. The effect of various parameters such as interest rate, present worth, annual cash flow etc. has also been worked out.

Avoiding Distortion in Corporate Valuation Litigation: An Application of Discounted Cash Flow

Avoiding Distortion in Corporate Valuation Litigation: An Application of Discounted Cash Flow

Mean-variance model for fuzzy capital budgeting

In an uncertain economic environment, it is usually difficult to predict accurately the investment outlays and annual net cash flows of a project. In addition, available investment capital sometimes cannot be accurately given either. Fuzzy variables can reflect vagueness of these parameters. In this paper, capital budgeting problem with fuzzy investment outlays, fuzzy annual net cash flows and fuzzy available investment capital is studied based on credibility measure. One new mean-variance model is proposed for optimal capital allocation. A fuzzy simulation-based genetic algorithm is provided for solving the proposed optimization problem. One numerical example and an experiment are also presented to show the optimization idea and the effectiveness of the algorithm.

A Stochastic Budgeting Analysis of Three Alternative Scenarios to Convert from Beef-Cattle Farming to Game Ranching

The main objective of this paper is to evaluate the profitability and financial feasibility of three alternative scenarios to convert from beef-cattle farming to game ranching. The analyses acknowledge the importance of quantifying the probability of failure or success when making investment decisions. Risk is incorporated into a standard net present value analysis using risk simulation. De-trended historical auction prices of live game and on-the-hoof prices of weaner cattle were used to quantify price variability. The stochastic net present value analyses indicate that game ranching is more profitable than cattle farming. Although an investment in a limited number of common game species is financially feasible, the cash flow analysis indicates a decreasing probability of making more money with game when annual cash flows are compared to those generated by means of cattle farming. Both the high-value game species scenarios are financially unfeasible during the first five years. These infeasibilities stem from a high probability of not covering instalments to finance game purchases, the extent to which these instalments are not covered, and the high probability of shortfalls in consecutive years.

Minority Venture Capital: Audio of Presentation

Available data describe the individual investments the venture capital (VC) funds made from 1989 to 2006 in small, primarily minority-owned businesses. They include annual cash flows measuring both dollar amounts invested and returned. Returns on realized investments are distinguished from returns on partially realized and unrealized investments. Also collected were traits of the VC funds themselves, including their funding sources, traits of general partners, types of involvement with portfolio companies, means used to generate deals, and others. Traits of the individual portfolio firms, in addition to cash flows, include industry, location, and minority-owner indicator variable.

Minority Venture Capital: Presentation

Available data describe the individual investments the venture capital (VC) funds made from 1989 to 2006 in small, primarily minority-owned businesses. They include annual cash flows measuring both dollar amounts invested and returned. Returns on realized investments are distinguished from returns on partially realized and unrealized investments. Also collected were traits of the VC funds themselves, including their funding sources, traits of general partners, types of involvement with portfolio companies, means used to generate deals, and others. Traits of the individual portfolio firms, in addition to cash flows, include industry, location, and minority-owner indicator variable.

Minority Venture Capital: Data Overview

Available data describe the individual investments the venture capital (VC) funds made from 1989 to 2006 in small, primarily minority-owned businesses. They include annual cash flows measuring both dollar amounts invested and returned. Returns on realized investments are distinguished from returns on partially realized and unrealized investments. Also collected were traits of the VC funds themselves, including their funding sources, traits of general partners, types of involvement with portfolio companies, means used to generate deals, and others. Traits of the individual portfolio firms, in addition to cash flows, include industry, location, and minority-owner indicator variable. Download the slides at: http://papers.ssrn.com/paper=1028000 Download the audio file at: http://papers.ssrn.com/paper=1029978

Assessing the Performance of Freestanding Hospitals

Freestanding hospitals are becoming less common as more hospitals are joining or establishing relationships with multihospital systems. These associations are driven by factors, such as unrelenting competition in local markets, aging physical plants, increasing labor costs, and higher physician fees, that place a high demand on financial assets. Despite these factors, many freestanding hospitals continue to do well financially, showing increases in total profit margins and total cash flow margins. This article examines which market, management, financial, and mission factors are associated with freestanding hospitals with consistently positive cash flows, relative to those without consistently positive cash flows. The study sample consisted of freestanding, nonfederal, short-term, acute care general hospitals with more than 50 beds and three years of annual cash flow data. Data were taken from the annual surveys of the American Hospital Association, the cost reports of the Centers for Medicare and Medicaid Services, and the Area Resource File of the Health Resources and Services Administration. The data were analyzed using logistic regression to identify those factors associated with a consistently positive cash flow. Freestanding hospitals with positive cash flows were found to have a greater market share and to be located in markets with a higher number of physicians and fewer acute care beds; to have fewer unoccupied beds, higher net revenues, greater liquidity, and less debt on hand; and to treat fewer Medicare patients than those without a positive cash flow. The findings suggest that these hospitals are located in resource-rich environments and that they have strong management teams.

Using the cash curve to discuss and discipline innovation investments

PurposeIntroduces the cash curve, a tool for monitoring the payback on innovation that has proved helpful in decision‐making, planning, analysis, and communication. The cash curve graphically plots cumulative cash flow over time.Design/methodology/approachDescribes the four “S” factors that have a direct impact on cash payback of innovation: start‐up costs or pre‐launch investment, also called start‐up or sunk costs; speed, or time to market; scale, or time to volume and support costsFindingsThe cash curve clarifies many of the managerial challenges, assumptions and trade‐offs that often get hidden when looking at spreadsheets of annual cash flows and projections.Practical implicationsShows managers how to use the cash curve to monitor what the payback will be if the assumptions they have made are right. This allows them to make a plan based on those assumptions, understand the impact of each assumption, determine which ones are most critical, test the ones with the biggest impact. With this perspective, the process can be managed, not simply reacted to.Originality/valueDemonstrates how to use the cash curve to address the fundamental challenge of innovation – to achieve the required cash payback by managing the overall process with the understanding that payback can come quite directly and quickly, but also that it may take longer, be much less certain, or come back to the company only indirectly, via other products and services.

How do Investors and Analysts React to Accruals? Evidence from a Quarterly Analysis

Prior research finds that annual accruals are negatively associated with abnormal returns subsequent to release of annual financial statements, but are not significantly associated if annual cash flows are considered. In this study, I analyze the relation of quarterly accruals and cash flows to abnormal returns subsequent to release of quarterly financial statements and to errors in financial analysts' forecasts of upcoming earnings. After controlling for the effect of cash flows, quarterly accruals are found to be significantly positively associated with both subsequent abnormal returns and analysts' forecast errors. These findings are inconsistent with the prior conclusion that investors and analysts are overoptimistic about firms reporting high accruals and as a result, overprice accruals. Instead, because this positive association can be interpreted as an underreaction, the findings suggest that investors and analysts may consistently underprice both accruals and cash flows. Furthermore, the findings also suggest that the accrual anomaly is unlikely to be merely the value-glamour anomaly in disguise.