CHAPTER 8

Capital Budgeting Analysis

LEARNING OBJECTIVES

  • Show the conceptual difference between profit and cash flow
  • Discuss the approach for calculating incremental cash flows
  • Explain the adjustment for tax effect of depreciation and salvage value
  • Describe the effect of changes in working capital on cash flows
  • Understand the concept of free cash flows
INTRODUCTION

The important message of the preceding chapter is that sound investment decisions should be based on the net present value (NPV) rule. The first difficult problem to be resolved in applying the NPV rule in practice is: What should be discounted? In theory, the answer is obvious: We should always discount cash flows. In reality, estimating cash flows is the most difficult task. ...

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