Corporate finance - WACC - Cash Flow - Measuring Return on Investment Assignment

Corporate finance - WACC - Cash Flow - Measuring Return on Investment - discounted cash flow techniques - Financing Decisions - - duty assignment ExampleAccounting cabbage be obtained from the income statements prepared in accordance with the applicable explanation 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 amidst the accounting earnings and cash flows, such as 1. direct 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 dissipated in order to develop the business infrastructure, e.g. purchasing a building, land, equipment etc. chthonian accounting earnings, operating expenditures are included in arriving at the last-place 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. ... However, due to low taxable income, the amount of tax is reduced substantially, which is in fact cash based expenditure. Under cash flow approach, depreciation, amortization and other non-cash expenses are not included, but the tax savings due to such non-cash expenses are included which lead to separate cash flows. In short, non-cash expenses in deriving accounting earnings but they are excluded in cash flow approach. However, tax benefits are included as cash inflow in cash flow based approach. 3. Accrual versus Cash co nventions Accounting earnings are purely established because of the relevant accounting standards and frameworks, such as GAAP and IFRS. These standards require the firms to draft their financial statements by utilizing accrual basis of accounting. Accrual basis of accounting states that, expenditure should be acknowledge in the financial statements in the expiration in which it is incurred, not in the period in which it is paid. Similarly, revenue is recognized in the financial statements in the period in which it is earned, not in the period in which it is received. On the other hand, cash flow approach works on the principle of cash inflows and outflows in the periods in which they are received and paid. Therefore, the major difference between accounting earnings and cash flows is the accrual versus cash based conventions, which lead to material differences between the amounts of returns obtained under both approaches. B. INCREMENTAL VERSUS TOTAL CASH FLOWS In order to analyze the return on investment, another important way to analyze is to flavour whether the whole firm is benefitted from that piece of investment or not. Obviously, a firm is benefitted from the cash