BU393 Lecture Notes - Fall 2018 Lecture 4 - Cash flow, Weighted arithmetic mean, Discount window
Document Summary
Cash outflows: expenditures on fixed assets are cash outflows. Investments in working capital have an opportunity cost: they could be invested elsewhere. Incremental approach equivalent to comparing 2 valuations of firm: with the new project and without. If difference is positive, then accept new project. Ignore sunk costs: should not affect future decisions, accepting project makes contribution towards those costs, ex. Externalities: positive or negative externalities are benefits granted to or costs borne by others and not the firm, not priced in project, you do(cid:374)"t (cid:272)are a(cid:271)out these. If the best method of producing paint is dumping stuff in the nearby river, you do(cid:374)"t (cid:449)orr(cid:455) a(cid:271)out it i(cid:374) a (cid:272)orporate fi(cid:374)a(cid:374)(cid:272)e perspe(cid:272)ti(cid:448)e unless the government imposes a cost on the project. Included in k, the cost of capital: cost of equity, debt, etc. is accounted for in the discount rate, k, financing charges are transaction costs not extra things like cash flows needed for a project.
