FIN3403 FINAL EXAM DEFINITIONS.docx - Capital Budgeting The...

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Capital Budgeting:The process of developing and evaluating long term investment projects of the firm.How to evaluate the alternative projects?1.Calculate NPV of the cash flows derived from the project and then subtract the initial cash outlay.2.If PV>Initial Cash outlay => NPV>0 => Value of firm increases, so accept the project when NPV>0.The Capital Budgeting Process1.Search and identification of new investment projects.2.Estimating cash flows3.Rejection or Selection4.Control & auditing after project has begun & endedInitial Cash Flow:The net cash flow after tax at time 0. At time zero a company buys a new machine or undertakes an investment project of some sort at time zero.Operating Cash Flow:Net cash flows that occur while the project is operating, usually OCF>0. The company incurs positive (additional revenues) or negative (reductions in costs, but these are still costs.Terminal Cash Flow:Cash flow at the end of the project This is the final cash flow in the

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