New project lifecycle

Changes in a company's cash flows that come from new projects are based on replacement, expansion and discontinuation.

Some examples include:

• Expansion into overseas markets
• Research on marketing with a brand plan
• Developing new products
• Opening a new branch
• Acquiring a company
• Branching into another industry

The lifecycle of a project can be represented in three distinct stages:

1. Initial CF - initial investment
2. Project CF - operation CF, investment
3. Final CF - operation CF, termination CF

Initial investment

Initial cash flows include:

1. Cost of assets acquired
2. Set up costs e.g. shipping and installation
3. Additional working capital required over the first year
4. Tax incentives provided by the government to induce firms to invest
5. Cash inflows resulting from the sale of existing assets, when the project involves a decision to replace assets, including taxes related to the sale

Operating cash flows

The forecasted future cash flows are shown in the Pro-forma statement

Terminal cash flows

Terminal cash flow assumes project termination. It includes the recovery of incremental working capital, after-tax resale value of any project assets, and any termination-related capital expenditures and costs.

Assuming a finite project life helps in project evaluation by providing a clear endpoint for cash flow projections and simplifying decision-making related to the project duration.