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Corporate finance - WACC - Cash Flow - Measuring Return on Investment - discounted cash flow techniques - Financing Decisions -
Finance & Accounting
Pages 19 (4769 words)
Name: Instructor’s Name: Course: Date: December 7, 2012 Question 1 In order to estimate Return on Investment (ROI), there are three kinds of approaches mainly used by the analysts. These three approaches are set out in the form comparative differences with respect to each other.
Accounting earnings are obtained from the income statements prepared in accordance with the applicable accounting standards and frameworks, whereas cash flows are determined as the cash inflows and outflows generated from a certain project. There are some major factors, which constitute the differences between the accounting earnings and cash flows, such as: 1. Operating and Capital Expenditures Operating expenditures are considered as those expenses, which are directly linked with the revenues such as direct material, direct labor, overheads etc. Conversely, capital expenditures are those expenditures, which are incurred by the firm in order to develop the business infrastructure, e.g. purchasing a building, land, equipment etc. Under accounting earnings, operating expenditures are included in arriving at the final net income figure. However, capital expenditures are spread over the useful lives of those assets and then systematically depreciated. Under cash flow estimations, both operating and capital expenditures are included in order to analyze the overall viability of the project. In short, the mainstream difference between the accounting earnings and cash flows is the exclusion of capital expenditures from the accounting earnings but its inclusion in cash flows. 2. ...
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