BUS 401 Principles of Finance Week 5 Final Project

As the financial analyst, should I focus on cash flows or profits?  This is a risky project and according to our text, “if the project has more risk than a typical project, then a higher required rate of return should apply. Otherwise, marginal projects will lower the firm’s share price—that is, reduce shareholders’ wealth” (Keown, Martin, & Petty, ch. 11, pg. 321).My decision when measuring wealth or value,is to use cash flows, not accounting profits, as our measurement tool. This means we should be concerned with when the cash flow comes in and when we should invest it to start earning interest on it.  We also have to be concerned with when we can give it back to the shareholders in the form of dividends. In other words, it is the cash flows, not profits that are actually received by the firm which can be reinvested.

Accounting profits appear when they are earned, not when the money is actually in hand.