Review question 816 diagram and describe the three

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Unformatted text preview: ew and analyze proposed investment decisions in order to make sure that only those that contribute positively to the value of the firm are undertaken. Utilizing a variety of tools and techniques, financial managers estimate the cash flows that a proposed investment will generate and then apply appropriate decision techniques to assess the investment’s impact on the firm’s value. The most difficult and important aspect of this capital budgeting process is developing good estimates of the relevant cash flows. The relevant cash flows are the incremental after-tax cash flows resulting from a proposed investment. These estimates represent the cash flow benefits that are likely to accrue to the firm as a result of implementing the investment. By applying to the cash flows decision techniques that capture time value of money and risk factors, the financial manager can estimate the impact the investment will have on the firm’s share price. Clearly, only those investments that can be expected to increase the stock price should be undertaken. Consistent application of capital budgeting procedures to proposed long-term investments shou...
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This document was uploaded on 01/19/2014.

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