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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
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- Fall '13