Why do managers focus on the effect that an investment will have on reported earnings rather than on the investments cash flow consequences?
Answer to relevant QuestionsWhat factors determine whether the annual ac-counting rate of return on a given project will be high or low in the early years of the investments life? In the latter years? For each of the projects shown in the following table, calculate the internal rate of return (IRR). Why do we consider changes in net working capital associated with a project to be cash inflows or out-flow rather than consider the absolute level of net working capital? Why must manager intuition be part of the investment- decision process regardless of a project NPV or IRR? Why is it helpful to think about real options when making an investment decision? Assuming that there are no corporate income taxes, how can the costs of preferred stock and debt be estimated without finding a preferred stock and a bond beta?
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