net capital outflow

(noun)

The net flow of funds being invested abroad by a country during a certain period of time.

Related Terms

Examples of net capital outflow in the following topics:

  • 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.

  • 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.

  • 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.

  • 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.

  • 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

  • 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).

  • 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.

  • 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.

  • 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).

  • 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.