ECON 2560 Chapter Notes - Chapter 9: Operating Cash Flow, Sunk Costs, Cash Flow

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30 Jul 2013
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Using discounted cash flow analysis to make investment decisions. To calculate npv, you need to discount cash flows not accounting profits. There is a difference between cash flow and profits. Income statements are intended to show how well the firm has performed but don"t track cash flows. Accountants don"t deduct capital expenditure when calculating the year"s income but instead depreciates it over time. A project"s present value depends on the extra cash flows that it produces. Forecast the firm"s cash flows 1st if you proceed w/ the project then forecast the cash flows if you don"t accept the project. The difference = the cash flows produced by the project (incremental cash flow) Incremental cash flow = cash flow with project cash flow without project. Be aware that new products often damage sales of an existing product. Sometimes the opposite occurs and a new project will help the firm"s existing business.

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