In conclusion, Chapter 5 discussed how to invest in projects as a whole with an eye on creating value (a macro perspective) for the company. One of the purposes of this chapter was to establish that projects are unique and bear different levels of risk (a micro perspective) than the risk of the company as a whole. In regard to value, it's all about how much cash your company can generate.
The underlying thought is to leverage the cost of a company's money from the owners of the equity and the debt with projects that generate positive returns. In order to establish awareness and recognition of how cash is generated, invested, and reported, a thorough explanation of how a statement of cash flows is constructed was supplied. The statement was further defined as an instrument that provides information about the magnitude and composition of a company's cash generating power.
The three sections of the statement of cash flows were delineated and explained. Those three sections were divided into operating activities, investing activities, and financing activities. The statement of cash flows laid the foundation for the concept of free cash flows. The procedure for deriving free cash flows from the statement of cash flows as well as a shortcut was discussed.
Once the tools for understanding how to derive cash flow were introduced, the concept of capital budgeting was introduced. Capital budgeting is the process of choosing one project over another given the constraints of the ...