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Topic 9

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Topic 9
The Purpose of this Topic * Remember, one of the two primary goals of the financial manager is to maximize owner wealth, and to do this the manager must identify and make long-term investments which produce a return equal to greater than the investments required rate of return. Thus, the purpose of this topic is to provide you with the knowledge and skills needed to identify, analyze and make capital or long-term investments (also known as Capital Budgeting) which are equal to or greater than the investments required rate of return.
The Focus of this Topic
The focus of this topic is for you to learn how to: 1. predict future cash flows from “ownership” investments, 2. calculate the present value of those cash flows, 3. compare the present value to the current purchase price of that investment, and 4. make an investment decision which attempts to maximize owner wealth. * While you can learn the steps in the process, it is important to remember that predicting future cash flows from ownership investments is difficult at best and depends on your ability to make reasonable and accurate assumptions about the future and how it will affect those cash flows. While numbers don’t “lie,” assumptions may, so keep in mind that your numbers are based your the accuracy of your underlying assumptions. * Ultimately, your job is to use your experience and judgment to make good assumptions about the investment’s future cash flows, and based on the assumptions and analysis, develop a course of action that allows you to maximize owner wealth.
Independent Versus Mutually Exclusive Investments * Independent Investments (projects or assets) are those whose cash flows are unrelated or independent of another investment, accepting this investment does NOT eliminate other investments from further consideration. * Mutually Exclusive…...

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