Question

The capital budgeting process is dependent on the anticipated cash flows generated by a proposed capital project. Research the importance of the price to cash-flow ratio and the free-cash flow in making managerial and investment decisions.

Cite at least one recent article in your post and provide a link for your classmates.

Answer 1

When considering new avenues of investment, managers and decision makers evaluate the prospect qualitatively as well as quantitatively. Quantitative analysis leads to determination of rate of return or profitability offered by the project. This rate of return is calculated based on the expected free cash flows generated by the project year on year. Free cash flows reflect the ability of the firm to invest in future projects that will increase the enterprise value.

Another important tool at the manager's disposal is the calculation of price to cash flows ratio. This ratio is significant because it shows you the cash flow generation capacity of the firm relative to its stock price. The earnings reported by a company can include non-cash items which gives an incorrect picture about the cash flows. It especially helps to evaluate companies with large non cash expenses.

https://www.paceretfs.com/media/pacer_perspective_may2016.pdf