Once an investment project is proposed, its cost and benefits must be estimated. This is usually done with the help of inputs provided by marketing, production, accounting and other departments. The role of the financial manager is to keep the exercise focused on relevant variables, co-ordinate efforts of various participants in this process and ensure that podcasts are reasonably balance and internally consistent. Usually the outcome of this process is the set of projections prepaid according to conventional Accounting principles. In order to derive the relevant stream of cost and benefits from these projections, the financial manager must bear in mind the following principles:
Cash flow principle
Long term funds principles
Interest exclusion principle
Posts tax principle
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Cash flow principle
Cost and benefits must be measured in terms of cash flows — costs are cash outflows and benefits are cash inflows. Cash outflows, not expenses as determined by accounting conventions, Aarti relevant measure of course because they represent the flow of purchasing power. By the same token, cash inflows, not revenues as determined by accounting conventions, reflect benefits properly.
Incremental Principle
Cash flows must be measured in incremental terms. This means that the changes in the cash flows of the firm which can be attributed to the proposed project alone are relevant. In estimating the incremental cash flows of a project
Long term Funds Principle: there are several points of view from which a project can be viewed. For example:-
1. Long term funds comprises of equality and long-term debt.
2. Current liabilities comprises of bank advance and spontaneous current liabilities such as trade credits, provisions, etc..
3. Total funds comprises of long term funds and current liabilities.
4. Fixed assets are fully supported by long term funds.
5. Current assets are partly supported by long term funds and partly supported by current liabilities. The portion of current assets that is supported by current liabilities. The portion of current assets that is supported by long term funds is called the net working capital.
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