Cashflows

In this lesson

1. 0:00 Lesson six: Net present value overview
2. 0:44 Cash flows and investment appraisal
3. 1:29 Relevant costs criteria explained
4. 2:20 Future costs and sunk costs
5. 3:05 Incremental and cash-only requirements
6. 4:08 Free cash flows in AFM
7. 5:17 Applications of free cash flows

About this lesson

You'll discover what makes a cash flow relevant (it must be future, incremental, and actual cash), explore the distinction between relevant costs and free cash flows, and understand why this foundation matters before applying NPV, IRR, and other investment appraisal techniques. The lesson covers three essential criteria for determining relevance: the cash flow must occur in the future (sunk costs don't count), it must change as a result of your decision, and it must be actual cash rather than accounting adjustments like depreciation. You'll also learn how free cash flows differ from simple relevant costs—they're broader measures that capture revenue, operating costs, investments, taxes, and working capital changes, representing the cash available to all investors in the business. By mastering cash flow identification now, you'll build confidence tackling complex investment scenarios that include inflation, taxation, and working capital adjustments. This is foundational knowledge that underpins NPV calculations, annuity and perpetuity problems, and real-world business valuation questions you'll encounter in your AFM studies and professional practice.

Duration: 6m