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While working with capital budgeting, one is actually performing valuation.
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In valuation, cash flows are identified and discounted down to present value. |
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In capital budgeting, valuation techniques are used to analyze the impact of real assets instead of financial assets. |
In capital budgeting just as in valuation, the emphasis is on cash flows—those cash flows at acquisition and every year thereafter for economic life of the project.
| Remember in capital budgeting what is important is cash flow, not profits. The cash flows at acquisition are called net investment and those every year after are termed net cash flows. |
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