Section outline

  • Module Homepage

  • 1. Introduction

    Welcome to the module "Project Cash Flows"! This module shows how to estimate the relevant cash flows of a project, the so-called incremental net cash flows (NCF).


    NPV image


    The main learning goals of this module are:
      • Know what the Net Cash Flow (NCF) is and we can estimate the NCF of any investment decision.
      • Learn how to incorporate interactions with other projects in the computation of the NCF.
      • Understand that only the cash flows matter that are caused by a specific capital budgeting decision.
      • Know how to treat inflation consistently in project valuation.
      • Understand how non-financial goals such as environmental, social, and governance (ESG) factors can be included in project valuation using an Adjusted Present Value (APV) approach.


    Activities: 0
  • This section provides the necessary conceptual framework to estimate the Net Cash Flows (NCF) of a project. More specifically, it identifies the key financial information we need to estimate the NCFs, and it presents a step-wise approach for how to get from project revenues to project NCFs. A set of introductory examples help us practice the computation of NCFs, arguably the most important step in any capital budgeting exercise.

    Activities: 3
  • For project valuation, we are interested in the incremental NCFs—the NCFs that are caused by a specific investment decision. In reality, these incremental cash flows are not always easy to identify, as many projects are not "green field" and have significant interdependencies with other projects. This section therefore addresses the main challenges in the estimation of incremental cash flows: Synergies with other projects, opportunity costs of the used resources, the treatment of overhead expenses, transfer pricing, and consulting fees, as well as the challenges surrounding the so-called sunk costs.

    Activities: 3
  • 4. Case Study

    Now that we know what incremental NCFs are and how we can estimate them, it is time for a comprehensive case study. The case study in this section reflects a real-life project, which has only been moderately simplified for didactical purposes.

    Activities: 3
  • Especially for projects with longer investment horizons, it is crucial that we treat inflation in a consistent way. This section first introduces the concept of inflation and shows how we can express cash flows and discount rates in nominal (actual dollars) and real (adjusted for inflation) terms. For project valuation, the rule is very simple: Always apply nominal discount rates to nominal cash flows and real discount rates to real cash flows. If we implement this simple rule correctly, the resulting project value will be the same.

    Activities: 3
  • This final section discusses how to incorporate non-financial goals in the capital budgeting process. The challenge is that many environmental, social, and governance (ESG) factors do not have a binding market price and are therefore not reflected in a standard NPV-analysis, which should always rely on market prices. The section discusses the growing relevance of these non-financial goals and shows that investors increasingly ask for sustainable returns. Then we present a simple Adjusted Present Value (APV) approach that allows us to incorporate ESG factors for which cost estimates or quasi-market prices exist (e.g., the emission of carbon dioxide).

    Activities: 4