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Corporate Investment Decisions by Michael Pogue

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Chapter 4

Cash Flows and Discount Rates

The appraisal techniques discussed in the previous chapter (with the exception of accounting rate of return) rely on establishing the expected cash flows arising from the project under consideration along with an appropriate discount (hurdle) rate to take account of the time value of money for the DCF methods.

Initially in this chapter, we shall consider the problem of identifying the relevant cash flows for inclusion in the project appraisal, together with any adjustments that may be necessary. In particular, we shall consider the potential effects of taxation and inflation on the cash flows. Subsequently, the task of estimating an appropriate discount rate (net present value [NPV]) or hurdle rate (internal ...

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