Long term Investment Decision: Capital Budgeting Cash Flows

A key responsibility of financial managers is to review and analyze proposed investment decisions to make sure that the firm undertakes only those that contribute positively to the value of the firm. Utilizing a variety of tools and techniques, financial managers estimate the cash flows that a proposed investment will generate and then apply decision techniques to assess the investment’s impact on the firm’s value. The most difficult and important aspect of this capital budgeting process is developing good estimates of the relevant cash flows. The relevant cash flows are the incremental after-tax cash flows resulting from a proposed investment. These estimates represent the cash flow benefits that are likely to accrue to the firm as a result of implementing the investment. By applying to the cash flows decision techniques that capture the time value of money and risk factors, the financial manager can estimate how the investment will affect the firm’s share price. Consistent application of capital budgeting procedures to proposed long-term investments should therefore allow the firm to maximize its stock price.

Download Files

gitman-pmf13-ppt11.ppt (1.55 MB )