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D E In this region the cumulative cash flow is positive. The project is earning a return
on the investment. CHEMICAL ENGINEERING
E F Toward the end of project life the rate of cash flow may tend to fall off, due to
increased operating costs and falling sale volume and price, and the slope of the
curve changes.
The point F gives the final cumulative net cash flow at the end of the project life.
Net cash flow is a relatively simple and easily understood concept, and forms the basis
for the calculation of other, more complex, measures of profitability.

6.10.2. Tax and depreciation
In calculating cash flows, as in Example 6.6, the project is usually considered as an
isolated system, and taxes on profits and the effect of depreciation of the investment are
not considered; tax rates are not constant and depend on government policy. In recent
years, corporation (profits) tax has been running at around 30 per cent and this figure
can be used to make an estimate of the cash flow after tax. Depreciation rates depend
on government policy, and on the accounting practices of the particular company. At
times, it has been government practice to allow higher depreciation rates for tax purposes
in development areas; or to pay capital grants to encourage investment in these areas.
The effect of government policy must clearly be taken into account at some stage when
evaluating projects, particularly when considering projects in different countries.

6.10.3. Discounted cash flow (time value of money)
In Figure 6.8 the net cash flow is shown at its value in the year in which it occurred. So
the figures on the ordinate show the “future worth” of the project: the cumulative “net
future worth” (NFW).
The money earned in any year can be put to work (reinvested) as soon as it is available
and start to earn a return. So money earned in the early years of the project is more
valuable than that earned in later years. This “time value of money” can be allowed for
by using a variation of the familiar compound interest formula. The net cash flow in
each year of the project is brought to its “present worth” at the start of the project by
discounting it at some chosen compound interest rate.
Net present worth (NPW) Estimated net cash flow in year n (NFW)
D 6.9
of cash flow in year n 1 C r n
where r is the discount rate (interest rate) per cent/100 and
nDt
NFW
Total NPW of project D 6.10
1 C r n
nD1
t D life of project, years.
The discount rate is chosen to reflect the earning power of money. It would be roughly
equivalent to the current interest rate that the money could earn if invested.
The total NPW will be less than the total NFW, and reflects the time value of money
and the pattern of earnings over the life of the project; see Example 6.6.