Present Value Is Used Extensively by Managers Who Are Reviewing

question 115

Essay

Present value is used extensively by managers who are reviewing proposed projects. How does the present value of a cash flow assist management in making these business decisions?

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Definitions:

Potential Dilutive Effect

The possible impact on a company’s earnings per share if convertible securities were converted into common stock, often considered in financial analysis.

If-Converted Method

A calculation technique used to assess the impact on diluted earnings per share if all convertible securities were converted into common stock.

Convertible Securities

Financial instruments, such as bonds or preferred stocks, that can be converted into a predetermined number of common stock or equity shares.

Diluted Earnings

The reduced earnings per share figure when considering the conversion into common stock of all potential shares that could dilute earnings.