HTA 602 Lecture Notes - Lecture 10: Cash Flow, Net Present Value, Capital Asset Pricing Model

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The cash flows that should be included in capital budgeting analysis are those that will only occur (or not occur) if the project is accepted. These cash flows are called incremental cash flows. The stand-alone principle allows us to analyze each project in isolation from the firm simply, by focusing on incremental cash flows. Asking the right question (cid:498)will this cash flow occur (cid:523)or not occur(cid:524) only if we accept the project? (cid:499) )f the answer is (cid:498)yes(cid:499), it should be included in the analysis because it is. )f the answer is (cid:498)no(cid:499), it should not be included in the analysis because it will. )f the answer is (cid:498)part of it(cid:499), then we should include the part that occurs (cid:523)or does not occur) because of the project occur anyway incremental. Capital budgeting relies heavily on pro forma accounting statements, particularly income statements.

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