Chapter 8Projecting Revenues, Expenses, and Capital Expenditures to Derive Pretax Cash Flow

When constructing the section of a model that forecasts essential pretax free cash flow items other than working capital changes—revenues, operating expenditures, and capital expenditures—making clear presentations using short formulas that are easy to follow should guide the modeling process. If possible, the working analysis that computes these items should begin with production capacity and quantity demand where the amount of new capacity is connected to the demand and production through making capital expenditures. A mistake sometimes made in some corporate models is to assume that historical capital expenditures that occurred during periods of surplus capacity continue after the capacity becomes constrained even though revenues continue to grow. In project finance models a challenge in computing the capital expenditure component of pretax cash flow is making the model flexible enough to simulate delays in construction and at the same time reflect the different patterns of construction expenditures that may occur over time.

Transparent Calculations of Pretax Cash Flow

To document how formulas for capacity levels, prices, capacity expansion, and revenues are computed, you should try to make the equations as transparent as possible. For a project finance model you generally show the capacity, the production and the prices that drive revenues, expenses, and capital expenditures as illustrated ...

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