Investing

Project evaluation cash flows and their timing

In project evaluation, the sign conventions which apply are cash outflows or expenditure being represented by negative figures, and cash inflows or income being represented by positive figures.

The timing of cash flows is very important in investment appraisal; for convenience an annual time scale is normally used where:

• Year 0: represents the date of making an investment:
• Year 1: represents the date one year after the initial investment. It is the end of the first year in the life of the investment and also it is the beginning of the second year.
• Year 2: represents the end of the second year and beginning of the third year of an investment, etc.

It is important to remember that year 0, year 1, year 2, etc., represent points in time. Many cash flows, however, cover periods of time, e.g. wages, overheads and sales. It is usual to aggregate these and treat them as arising at the end of the year in which they occur.