11.1 Project Cash Flows

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Chapter 10 introduced the capital budgeting process and the techniques financial managers use for evaluating and selecting long-term investment projects. To evaluate these opportunities, financial managers must identify the net cash flows associated with the investment opportunity. A project’s net cash flows are the net (or the sum of) incremental after-tax cash flows over a project’s life. The incremental cash flows represent the additional after-tax cash flows—outflows or inflows—that will occur only if the firm makes the investment. As noted in Chapter 4, we focus on cash flows rather than accounting figures because cash flows directly affect the firm’s ability to pay bills and purchase assets. Once they ...

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