Discussion Prompt: Cash Flow Case Study

We examine methodologies in this session to convert earnings to free cash flows, but as corporate finance managers, we must go beyond technique to practical application and explanation. Suppose you work with a CEO who is enthused about and wishes to embark on a project that will immediately increase earnings. You are concerned that the project will result in several years of negative cash flows.

With this case study in mind, answer the following questions:

• How might this discrepancy occur?
• How would you explain and demonstrate to the CEO your concern about the project's viability?

Provide factual support for your contributions to this discussion.