RWJ chapter 7 - Chapter 7 Making capital investment...

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Chapter 7: Making capital investment decisions Corporate Finance Ross, Westerfield, and Jaffe
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Outline 7.1 Relevant cash flows 7.2 A comprehensive example
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So far, we have learned… We need to evaluate a new project using the TVM technique. That is, we should discount future expected cash flows (specifically, FCFs) back to present time and compare PV to initial costs: whether NPV > 0? The appropriate discount rate is WACC, which is a function of the cost of debt and the cost of equity. We can use the CAPM to estimate the cost of equity. In 7.2, we would like to put all these into a comprehensive example.
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Relevant cash flows But before we do this, a few notions about cash flows need to be addressed. The cash flows in the capital-budgeting time line need to be relevant cash flows; that is they need to be incremental in nature. The cash flows that should be included in a capital budgeting analysis are those that will only occur if the project is accepted.
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