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Changes in taxes can significantly impact the cash flows from an investment. If taxes increase, the net cash flow from the investment decreases because a larger portion of the earnings is paid as tax. Conversely, if taxes decrease, the net cash flow from the investment increases as less money is paid as tax. It's important to factor in potential tax changes when forecasting cash flows from an investment.
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Determine the initial cash outlay – this includes items such as equipment costs, shipping costs, installation costs, start-up costs, training for the people involved, etc. "Everything that goes into getting the project up and running has to be part of your initial cash outlays. If you're just buying a new machine, it's pretty easy to estimate all the costs. A project or initiative that is likely to take several months will be harder," Knight says. Forecast the cash flows from the investment – here, you need to estimate the net cash the investment will bring, allowing for variables like increased working capital, changes in taxes and adjustments for non-cash expenses. Putting the cash flows on a calendar will aid your estimation of returns year by year or even month by month. Determine the minimum return – the minimum rate of return is often called a "hurdle rate." Companies may have more than one hurdle rate depending on the risk involved in proposed investments. Knight says: "The fina...
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Need help with which companies or projects to invest in? As a key driver of value in business, ROIC measures how well the company deploys its capital....
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Discover a new approach to wealth management and start with small steps that can eventually lead to substantial assets. Robert Kiyosaki, author of the viral book Rich Dad Poor Dad, explains how anyone can move to the lucrative side of the Cashflow Quadrant and flourish financially.
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