Cash outflow

Definition

Cash outflow is the movement of money out of a business, typically for expenses, investments, or other payments. It is a crucial factor in evaluating the financial viability of capital investment decisions.

5 Must Know Facts For Your Next Test

1. Cash outflow must be carefully estimated to accurately determine the payback period of an investment.
2. High initial cash outflows can significantly affect a project's net present value (NPV).
3. In capital budgeting, cash outflows are often compared against cash inflows to assess return on investment.
4. Non-discretionary cash outflows include mandatory costs like maintenance and operating expenses.
5. Accounting Rate of Return (ARR) does not account for the timing of cash outflows, which can be a limitation in evaluating investments.

Review Questions

• Why is estimating cash outflow critical in determining the payback period?
• How do initial cash outflows impact net present value (NPV) calculations?
• What is a limitation of Accounting Rate of Return (ARR) concerning cash outflows?

Related terms

Payback Period: The time it takes for an investment to generate an amount of income or cash equivalent to the cost of the investment.

Net Present Value (NPV): The difference between the present value of cash inflows and outflows over a period.

Accounting Rate of Return (ARR): A financial ratio used to measure the expected annual profitability of an investment.