Project Management

as a result of executing your project: e.g., an increase in rev-
enue from sales, a reduction in production or operating costs,
material savings, and waste reduction. Cash outflowsare any
erxpenditures or losses due to the project or its downstream
effects. The most obvious cash outflow is the cost of the project
itself. However, an increase in operating costs due to the project
would also be a cash outflow.

Step 2: Estimate the Magnitude of Specific Cash Flows. In
some cases, it will be fairly straightforward to estimate cash
flows. In other cases, it may be very difficult. For example, con-
sider how confident you would feel in placing a specific dollar
valueon these benefits:

• Increased output due to enhanced employee satisfaction


• Improvement in vendor delivery reliability


• Improvement in workforce safety
  Increase in user comfort or convenience


• Reduction in potential legal action against your organiza-
  tion
  In estimating some of these types of cash flows, it can be
  very useful to rely on historical data or benchmark data.

Step 3: Chart the Cash Flows. After you’ve estimated the
magnitude of all cash flows, you can construct a cash flow dia-
gram (such as the one in Figure 4-2). You should chart all cash
outflows and inflows year
by year throughout the
useful life of the project.
At the bottom of the
cash flow diagram are the
year-by-year cash flow
totals and the cumulative
cash flows throughout the
useful life of the project.
The final step consists
of making an allowance for the time value of money.

Defining Your Project 61

Useful lifeThe period of

time over which the financial

analysis will be conducted.

Although it’s related to factors such as

the anticipated working life of an asset

or the expected size of a market win-

dow, it’s actually a value that your

accounting department establishes.