chapter 8 - Chapter 8 Using discounted cash-flow analysis...

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COPYRIGHT©ZHULI 1 Chapter 8 Using discounted cash-flow analysis to make investment decisions
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COPYRIGHT©ZHULI 2 Objectives 1. Identify the cash flows properly attributable to a proposed new project 2. Calculate the cash flows of a project from standard financial statements 3. Understand how the company’s tax bill is affected by depreciation and how this affects project value 4. Understand how changes in working capital affect project cash flows
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COPYRIGHT©ZHULI 3 Content Identifying cash flows Calculating cash flow An example: Blooper industries
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COPYRIGHT©ZHULI 4 Discount cash flows, not profits When calculating NPV, recognize investment expenditures when they occur, not later when they show un as depreciation. Projects are financially attractive because of the cash they generate, either for distribution to shareholders or for reinvestment in the firm. Therefore, the focus of capital budgeting must be on cash flow, not profits
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COPYRIGHT©ZHULI 5 Discount incremental cash flows Include all indirect effects Forget sunk costs: sunk costs remain the same whether or
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chapter 8 - Chapter 8 Using discounted cash-flow analysis...

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