Calculating cash flow and net present value (see paper for details).
From the presented case of the manufacturing organization, revenue outflows are the additional support costs of £4K every year. Capital inflows refer to those incomes that are generated from other activities other than the normal trading of an entity. In the case of the manufacturing organization such capital inflows is the sale of machinery. On the other hand, revenue inflows are those incomes that are generated by an entity from its normal operations by selling goods or services.
To establish the payback period, the cumulative cash flows was established, but from the above calculations, the manufacturing organization could not cover its initial investment costs of £410K from the net cash flows it generates within a period of five years.
It is also a discounted cash flow technique that uses the principle of NPV. It is individual investment’s rate of return when it is considered in isolation or independently of all other investments that the firm undertakes. It is that rate of return which is inherent or internal to the cash flow of a given project. It is the discounting or required rate of return that gives a zero NPV i.e. ∑PVs – I0 = 0 NPV. Internal rate of return is established through trial and error, interpolation, or extrapolation method. Through the trial and error, a rate of interest is selected at random and is used in the establishment of NPV of the cash flows. If the rate chosen gives a lower NPV than the cost, a lower rate is chosen and if the rate gives a greater NPV, a higher rate is chosen.