27 - Suppose an analyst makes a mistake and calculates the...

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Suppose an analyst makes a mistake and calculates the NPV or an investment project by discounting the project's contribution to net income each year rather than by discounting its cash flow. Would you expect the NPV based on net income to be higher or lower than the NPV calculated using cash flows? In capital budgeting decisions, the focus is on cash flows and not on accounting net income. The reason is that accounting net income is based on accruals that ignore the timing of cash flows into and out of an organization. From a capital budgeting standpoint, the timing of cash flows is important, since a dollar received today is more valuable than a dollar received in the future. Therefore, even though accounting net income is useful for many things, it is not ordinarily used in discounted cash flow analysis. Instead of determining accounting net income, the manager concentrates on identifying the specific cash flows of the investment project. When calculating a project’s NPV, analysts should ignore the costs of raising the money to
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27 - Suppose an analyst makes a mistake and calculates the...

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