Review. FINA 7330 Advanced Corporate Finance Lecture 13 Ronald F. Singer Fall, 2009. Making Investment Decisions. NPV Rule Incremental Cash Flow After Tax basis when paid Opportunity Costs Changes in Working Capital Depreciation Not a Cash Flow Treat Inflation Consistently
Advanced Corporate Finance
Ronald F. Singer
Mutually Exclusive Projects: Basically dealing with mutually exclusive decisions
In general, you “smooth” the cash flows by finding Equivalent Annual Cash Flow, so that projects can be compared.
Where the dividend target (Div(t)*) is determined as a proportion of long run earnings
+ Managers are motivated to only invest in projects that earn more than they cost.
+ EVA makes cost of capital visible to managers.
+ Leads to a reduction in assets employed.
- EVA does not measure present value
+ Present Value of EVA does measure NPV and thus consistent rewarding via EVA leads to good decisions