Analysis of capital investment: A conceptual cash flow model

This paper introduces a conceptual cash flow model for strategic capital investments. The model focuses on the dynamic situation in the business environment and investments in the business environment and investments as tools for the management during the whole lifespan. The main purpose of the model is to understand the economic consequences of an investment, although it is impossible to express them all in figures when making the decision. As the conceptual model needs no figures, this problem is avoided. The cash flow for the base investments is separated into two levels, basic cash flow and total cash flow. The net present value of basic cash flow can be calculated and may be negative although the investment is profitable. The calculation of total cash flow requires knowledge which is not available when the decision is made. The concepts of options and pre-options constitute the difference between basic and total cash flow. They are used to focus the opportunities which are created by the investment but not taken into consideration in basic cash flow. These considerations have to be taken otherwise, but all of them cannot be translated into money.