Need a good definition or way to explain (in layman terms) what Operating Cash Inflows is and how it relates to a Capital Expenditure. Specifically in the case of evaluating which replacement alternative to pursue.

Thanks

Monique, the phrase "Operating Cash Flows" is kind of descriptive; it refers to those cash flows that are a direct consequence of your normal business operations. Or coming at it another way, it's your company's cash flows after removing the flows that relate to non-business operations, such as ancillary investments.

With respect to a capital expenditure, then, you'd want to forecast how your OCF will change as a result of the capex investment. Think "with and without".

For example, let's say the Utility bill for my li'l factory runs around $3,000 a month. I'm thinking of buying a new machine. It's a power hog--my monthly power bill will go up to $3,150 a month. On the plus side, the increased efficiency of the machine will allow me to lay off my shiftless brother-in-law, saving me $2,500 a month in labor costs.

With the new machine, then, the changes in my Operating Cash Flows are a positive 2.5K, and a negative 150, for a net benefit of $2,350 each month. (Okay, there's an additional bene of not having to listen to my bro-in-law's corny jokes all day, but that's outside the scope of finance theory.)

In evaluating the potential purchase of this machine, then, I'd say the machine produces an Operating Cash Inflow of $2,350 per month. This becomes one of the key inputs I use in deciding whether to get this machine, or a competing model, or nothing at all.

There's a lot of other factors you'll throw into the decision blender, of course, but maybe this'll get you started in the right direction. Best of luck!

...it was early and I was full of no coffee...