Part 2 — Investment Decisions

The process of planning, evaluating, and selecting long-term (multi-year) investments in assets whose cash flows extend beyond one period; aims to maximize shareholder value.

Identification, screening/evaluation, selection, financing, implementation, and post-audit (control/review).

Compares actual project results to the original estimates to improve future forecasting, hold managers accountable, and decide whether to continue/abandon.

Independent: accepting one does not affect another (accept all that meet criteria). Mutually exclusive: choosing one precludes the others (pick the single best).

A constraint where limited funds prevent accepting all positive-NPV projects; the firm selects the combination that maximizes total NPV within the budget.

Decisions are based on incremental, after-tax cash flows because cash, not accrual income, drives value and reinvestment; accounting income includes noncash items.