net capital outflow
(noun)
The net flow of funds being invested abroad by a country during a certain period of time.
Examples of net capital outflow in the following topics:
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Calculating the Payback Period
- Payback period in capital budgeting refers to the period of time required for the return on an investment to "repay" the sum of the original investment.
- Start by calculating Net Cash Flow for each year: Net Cash Flow Year 1 = Cash Inflow Year 1 - Cash Outflow Year 1.
- Then Cumulative Cash Flow = (Net Cash Flow Year 1 + Net Cash Flow Year 2 + Net Cash Flow Year 3 ... etc.)
- They discount the cash inflows of the project by a chosen discount rate (cost of capital), and then follow usual steps of calculating the payback period.
- First, the sum of all of the cash outflows is calculated.
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The Capital Account
- The capital account acts as a sort of miscellaneous account, measuring non-produced and non-financial assets, as well as capital transfers.
- The first is a broad interpretation that reflects the net change in ownership of national assets.
- The capital account can be split into two categories: non-produced and non-financial assets, and capital transfers.
- For example, if a domestic company acquires the rights to mineral resources in a foreign country, there is an outflow of money and the domestic country acquires an asset, creating a capital account deficit .
- Thus, the balance of the capital account is calculated as the sum of the surpluses or deficits of net non-produced, non-financial assets, and net capital transfers.
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Relationships Between Statements
- If expenses exceed revenue then a net loss is the result.
- These changes usually consist of the addition of net income (or deduction of net loss) and the deduction of dividends.
- The statement of shareholder's equity reconciles changes in the equity accounts (contributed capital, other capital, treasury stock) from the beginning to the ending balance sheet.
- The statement of cash flows shows the cash inflows and cash outflows from operating, investing, and financing activities.
- That is, the net change in the balance sheet accounts will not equal net income.
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Defining NPV
- Net Present Value (NPV) is the sum of the present values of the cash inflows and outflows.
- Every investment includes cash outflows and cash inflows.
- The net present value (NPV) is simply the sum of the present values (PVs) and all the outflows and inflows:
- Don't forget that inflows and outflows have opposite signs; outflows are negative.
- NPV = 0: The PV of the inflows is equal to the PV of the outflows.
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Deciding to Refund Bonds
- The decision of whether to refund a particular debt issue is usually based on a capital budgeting (present value) analysis.
- Step 2: Calculate the net investment (net cash outflow at time 0).
- The call premium is a cash outflow.
- Net present value of refunding = Present value of interest savings - Present value of net investment
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Defining the Payback Method
- In capital budgeting, the payback period refers to the period of time required for the return on an investment to "repay" the sum of the original investment.
- While the time value of money can be rectified by applying a weighted average cost of capital discount, it is generally agreed that this tool for investment decisions should not be used in isolation.
- Alternative measures of "return" preferred by economists are net present value and internal rate of return.
- Start by calculating net cash flow for each year: net cash flow year one = cash inflow year one - cash outflow year one.
- Then cumulative cash flow = (net cash flow year one + net cash flow year two + net cash flow year three).
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Calculating the NPV
- The NPV of an investment is calculated by adding the PVs (present values) of all of the cash inflows and outflows .
- Cash inflows (such as coupon payments or the repayment of principal on a bond) have a positive sign while cash outflows (such as the money used to purchase the investment) have a negative sign.
- A firm's weighted average cost of capital after tax (WACC) is often used.
- Another approach to selecting the discount rate factor is to decide the rate that the capital needed for the project could return if invested in an alternative venture.
- If, for example, the capital required for Project A can earn 5% elsewhere, use this discount rate in the NPV calculation to allow a direct comparison to be made between Project A and the alternative.
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Disadvantages of the Payback Method
- While the time value of money can be rectified by applying a weighted average cost of capital discount, it is generally agreed that this tool for investment decisions should not be used in isolation.
- Alternative measures of "return" preferred by economists are net present value and internal rate of return.
- Additional complexity arises when the cash flow changes sign several times (i.e., it contains outflows in the midst or at the end of the project lifetime).
- First, the sum of all of the cash outflows is calculated.
- The modified payback period is calculated as the moment in which the cumulative positive cash flow exceeds the total cash outflow.
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Ranking Investment Proposals
- The most valuable aim of capital budgeting is to rank investment proposals.
- NPV can be described as the "difference amount" between the sums of discounted: cash inflows and cash outflows.
- The internal rate of return on an investment or project is the "annualized effective compounded return rate" or "rate of return" that makes the net present value (NPV as NET*1/(1+IRR)^year) of all cash flows (both positive and negative) from a particular investment equal to zero.
- ARR calculates the return, generated from net income of the proposed capital investment.
- Each cash inflow/outflow is discounted back to its present value (PV).
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Introduction to the Retained Earning Statement
- Generally, retained earnings are the accumulated net income of the corporation (proprietorship or partnership) minus dividends distributed to stockholders.
- The Statement of Shareholder's Equity shows the inflows and outflows of capital, including treasury stock purchases, employee stock options and secondary equity issuance.
- These items are not part of net income, yet are important enough to be included in comprehensive income, giving the user a bigger, more comprehensive picture of the organization as a whole.Items included in comprehensive income, but not net income are reported under the accumulated other comprehensive income section of shareholder's equity.
- The retained earnings account on the balance sheet represents an accumulation of earnings since net profits and losses are added/subtracted from the account from period to period.
- Ending Retained Earnings = Beginning Retained Earnings − Dividends Paid + Net Income.