FINA 2710 Chapter Notes - Chapter 1-10: Net Impact, Expected Return, Private Placement
Document Summary
Chapter 9: using discounted cash flow analysis to make investment decisions. To calculate npv, you need to discount cash flows, not accounting profits. Accountants don"t deduct capital expenditure when calculating the years income flow if you proceed with the project then the cash flows if you don"t. Take the but instead depreciates it over several years, which can cause differences. When calculating npv, recognized investment expenditures when they occur, not later when they show up as depreciation, projects are financially attractive because of the cash they generate, either for distribution to shareholders or for reinvestment in the firm. Therefore, the focus of capital budgeting must be on cash flow not profits. An npv depends on the extra cash flows that it produces. Forecast the firms cash difference and if you have incremental cash flows, proceed. Incremental cash flow = cash flow with project cash flow without project.