Methods of Financial Analysis

You can now apply these concepts to the financial analysis of proposed investments. Three basic financial analysis techniques are as follows:

  1. The net present value method

  2. The internal rate of return method

  3. The payback method

These methods work with cash flows. Cash flow is the cash that will flow into and out of the organization because of the project, including revenues, costs, and changes in assets and liabilities. Be sure to remember two points when determining cash flows for any project:

  1. Consider only the amounts of cash flows that will change if the project is undertaken. These amounts are called incremental cash flows and are the difference between the cash flows with the project and without it.

  2. Convert cash ...

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