Long-run earnings growth occurs primarily because firms retain earnings and reinvest them in the business.
The constant growth model can be used if a stock's expected constant growth rate is less than its required return.
All other variables held constant, investments paying simple interest have to pay significantly higher interest rates to earn the same amount of interest as an account earning compound interest. (T/F?)
2) The cash flow effect from a change in Net Working Capital is always equal in size and opposite in sign to the changes in Net Working Capital. T/F
1) The most difficult part of the capital budgeting process is accurately estimating cash flows and cost of capital. T/f
2) Interest and other financing-related expenses are excluded when determining a project's unlevered net income.
A) They do not tell how the decision affects the firm's reported profits from an accounting perspective.
A) Yes, since he invested a valuable asset, his time, in a project based on its previous costs .
Incremental cash flow is the additional operating cash flow that an organization receives from taking on a new project. A positive incremental cash flow means that the company's cash flow will increase with the acceptance of the project. A positive incremental cash flow is a good indication that an organization should invest in a project.
There are several components that must be identified when looking at incremental cash flows: the initial outlay, cash flows from taking on the project, terminal cost or value, and the scale and timing of the project. Incremental cash flow is the net cash flow from all cash inflows and outflows over a specific time and between two or more business choices.
The simple example above explains the idea, but in practice, incremental cash flows are extremely difficult to project. Besides the potential variables within a business that could affect incremental cash flows, many external variables are difficult or impossible to project. Market conditions, regulatory policies, and legal policies may impact incremental cash flow in unpredictable and unexpected ways. Another challenge is distinguishing between cash flows from the project and cash flows from other business operations. Without proper distinction, project selection can be made based on inaccurate or flawed data.
Incremental cash flow can be a good tool to assess whether to invest in a new project or asset, but it should not be the only resource for assessing the new venture. 1:15.