Evaluation Concepts

Evaluation is a process of providing information for decision making. It Includes measurement, assessment and testing, and is a process that involves information gathering, information processing and forming judgements.

Basic Concepts

Cash Flow

A cash flow forecast is an estimate of the amount of money you expect to flow in and out of your business and includes all your projected income and expenses. In Kwik Look there is a monthly one year forecast, and a yearly five year forecast. The purpose of the cash flow forecast is to ensure that the cash needs of your business are met (ie. this means that you will be able to pay your bills as and when they fall due)

Maximum Cash Exposure

This is the total accumulation of cash outflow that occurs until such time as the business begins to reflect a positive net after-tax cash flow. It can be thought of as the amount of funding/capital your business is projected to require.

Breakeven Period

The time needed for revenue to equal total costs and hence for the cumulative cash flow to equal zero. It is the time required to get back your capital. Note that the scale on the right and left hand side of the cash flow chart may differ.

Value Creating Investment Decisions

An investment decision takes into account how much money is invested (put at risk) and how money is expected from it in the future (reward). In general, the higher the risk, the higher the reward required.

Other Concepts

Net Present Value (NPV)

Annual cash flows that are discounted (to account for opportunity cost) to its present value at a specific reference date.

Internal Rate of Return (IRR)

Is the interest rate at which the net present value of all the cash flows (both positive and negative) from a project or investment equals zero. Internal rate of return is used to evaluate the attractiveness of a project or investment.

Inflation

Inflation is a sustained increase in the general price level of goods and services in an economy over a period of time. When the price level rises, each unit of currency buys fewer goods and services. Consequently, inflation reflects a reduction in the purchasing power of money