ch 10 (Making Investment Decisions)

ch 10 (Making Investment Decisions) - Key Concepts and...

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10 Making Capital Investment Decisions Slide 10 - 1 ± Understand how to determine the relevant cash flows for different types of proposed investments ± Be able to compute depreciation expense for tax purposes ± Understand alternative methods for computing operating cash flow Key Concepts and Skills
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Slide 10 - 2 Project Cash Flows ± Relevant Cash Flows The cash flows that should be included in a capital budgeting analysis are those that will only occur if the project is accepted. These cash flows are called incremental cash flows. The stand-alone principle: Evaluation of a project may be based on the project’s incremental cash flows. So we analyze each project in isolation from the firm simply by focusing on the resulting incremental cash flows. Slide 10 - 3 ± The Question You Should Always Ask “Will this cash flow occur ONLY if we accept the project?” If the answer is “yes”, it should be included in the analysis because it is incremental If the answer is “no”, it should not be included in the analysis because it will occur anyway If the answer is “part of it”, then we should include the part that occurs because of the project Project Cash Flows
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