What are the four steps used to forecast a project’s future cash flows according to the chapter on the Cost of Capital?

The four steps used to forecast a project’s future cash flows are: 1) Measure the effect of the proposed investment on the firm’s operating cash flows. 2) Calculate the project’s requirements for working capital. 3) Calculate the project’s cash requirements for capital expenditures. 4) Combine the project’s operating cash flow with investments in net operating working capital and capital expenditures to determine the project’s free cash flow.

To forecast a project’s future cash flows, the process begins by measuring the impact of the investment on operating cash flows, which includes estimating incremental revenues and expenses. Next, the requirements for working capital are calculated, taking into account changes in accounts receivable, inventories, and accounts payable. The third step involves determining the cash requirements for capital expenditures, which are necessary for property, plant, and equipment. Finally, the operating cash flow is combined with the investments made in working capital and capital expenditures to calculate the project's free cash flow, which reflects the total cash available for distribution.