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Chap009.ppt - Cash Flows Ct C1 C2 NPV C0 1 2 t(1 r(1 r(1 r...

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9- 2 Cash Flows Chapter 8 introduced valuation techniques based on discounted cash flows. This chapter develops criteria for properly identifying and calculating cash flows. 1 2 0 1 2 ... (1 ) (1 ) (1 ) t t C C C NPV C r r r
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9- 3 Identifying Cash Flows: Cash Flow vs. Accounting Income Discount actual cash flows, not necessarily net income. Using accounting income, rather than cash flow, could lead to erroneous decisions.
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9- 4 Incremental Cash Flows Discount Incremental Cash Flows Include All Indirect Effects Forget Sunk Costs Include Opportunity Costs Recognize the Investment in Working Capital Beware of Allocated Overhead Costs Remember Shutdown Cash Flows Incremental Cash Flow Cash Flow with Project Cash Flow without Project = -
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9- 5 Inflation and Discounting Cash Flows Discounting Rule: Discounting Rule: Real cash flows must be discounted at a real discount rate, nominal cash flows at a nominal rate.
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