Project Cash Outflows – Parent Perspective
The first step in NPV is identifying "How much money leaves our pocket?".
1. Components of Initial Outflow
- Equity Investment: Cash sent from India to Vietnam to start the company.
- Loan Guarantees: Sometimes Parent guarantees a loan, which reduces its own borrowing capacity.
- Working Capital: Initial inventory and cash required to run operations.
2. What to Include vs Exclude?
Include (Relevant)
- Initial Equity Injection: The actual cash sent.
- Opportunity Cost: If we use an old machine in Vietnam, its resale value in India is an Opportunity Cost (Outflow).
- Working Capital: Money tied up in inventory.
VS
Exclude (Irrelevant)
- Sunk Costs: Money already spent on Market Research last year. (It is gone regardless of decision).
- Allocated Overheads: CEO's salary (He gets paid anyway).
3. Exam Notes: Writing the Answer
Question: "Explain the components of Project Cash Outflows." (5 Marks)
Answering Strategy:
- Definition: Initial Investment.
- List: Equity, Debt, Working Capital.
- Concept: Mention "Sunk Cost Fallacy" (Do not include past expenses).
Summary
- Accuracy: Under-estimating outflow is the #1 reason for project failure.
- Currency: Outflows happen in Home Currency (Equity) and Foreign Currency (Local borrowing).
Quiz Time! 🎯
Test Your Knowledge
Question 1 of 4
1. Sunk Costs (e.g., past market research) should be: