Chapter 14. Capital Budgeting and Cash Flow Analysis

Agenda

Item 1

Explain what capital budgeting is.

Item 2

Explain the relationship between capital budgeting and owners' wealth.

Item 3

Identify the capital budgeting process.

Item 4

Identify the different ways that capital budgeting projects can be classifed.

Item 5

Identify and classify the cash flows associated with an investment project.

Item 6

Describe and illustrate how to estimate the investment cash flows of an investment project.

Item 7

Describe and illustrate how to estimate the operating cash flows of an investment project.

Item 8

Explain how the net cash flow for each period of a project's useful life is estimated.

The value of a particular asset is not always easy to determine. However, CFOs and other financial managers continually face decisions about which assets to invest in. The CFO's objective is to make investment decisions that are consistent with the strategic plan of the company and its objectives, evaluating investment opportunities and selecting those that add value to the company. The challenge is make investments that are suffcient to replace any deteriorating plant and equipment, while at the same time identify value‐adding investments—all while keeping within funds available and financing constraints.

The focus of this chapter is on estimating how a company's cash flows are expected to change in the future as a result of an investment decision. As will become apparent, estimating cash flow is an imprecise art at best. ...

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