Hey everybody, welcome back to corporate finance.
Today we're going to start in on lecture two of discounted cash flow analysis.
But before doing so let's do a brief recap of our last lecture.
So we introduced the topic discounted cash flow analysis by discussing
decision making.
And we talked about several different decision rules used in practice.
Beginning with the NPV rule, which is nothing more than the difference between
the present value of costs and the present value of benefits.
And while most academics including me will argue that this is
the best rule that you should always use.
I take a practical view and recognize that other rules, such as Internal Rate
of Return and payback period, contain relevant information for decision making.
That if used wisely, and
in recognition of their limitations, can lead to better decisions.
And so that's sort of the overarching approach we're going to take
to DCF is that there are several different decision rules.
We'll rely on NPV, but use what we can from other decision rules.
Now, in this lecture I want to talk about sort of the bedrock or
one of the key components of any DCF and
any sort of decision making and that's free cash flow, specifically, what is it?
So, let's get started.