Lecture 29 - Business Finance (ACC501) Lesson 29 Review of...

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Business Finance (ACC501) Lesson 29 Review of the Previous Lecture Payback Period Net present Value Internal Rate of Return Profitability Index Average Accounting Return Capital Budgeting Practice Topics under Discussion Making Capital Investment Decisions Project Cash Flows Incremental Cash Flows Pro Forma Financial Statements Making Capital Investment Decisions We shall now spread the numbers for a proposed investment or project and, based on those numbers make an initial assessment about whether or not the project should be undertaken. We will focus on a the process of setting up a discounted cash flow analysis. While evaluating a proposed investment, special attention is paid to the relevance of the information available for decision making Project Cash Flows To evaluate a proposed investment, we must consider the changes in the firm’s cash flows and then decide whether or not they add value to the firm The first step is, thus, to decide which cash flows are relevant and which are not Relevant Cash Flows A relevant cash flow for a project is a change in the firm’s overall future cash flow that comes about as direct consequence of the decision to take the investment Since the relevant cash flows are defined in terms of changes in, or increments to, the firm’s existing cash flow, they are called the incremental cash flows associated with the project Incremental Cash Flows The incremental cash flows for project evaluation consist of any and all changes in the firm’s future cash flows that are a direct consequence of taking the project. The Stand-Alone Principle
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Lecture 29 - Business Finance (ACC501) Lesson 29 Review of...

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