chapter  10
32 Pages

Value enhancement through financial decision making

Financial decision making is often guided by two fundamental principles: the time value of money and incremental cash flows. The first principle, the time value of money, states that a dollar received today is worth more than a dollar received tomorrow. We use this concept to understand the importance of cash flows generated over a specific period of time. We also employ this principle to analyze capital budgeting projects and how these can increase the value of the entrepreneurial firm. The second concept, relating to incremental cash flows, suggests that we only consider incremental costs and benefits which directly accrue from investing into a specific project. The incremental cash flow is defined as the cash flow that occurs if the project is undertaken; it will not occur if the project is rejected.