312.3
3. Why do we concentrate on free cash flows in
capital budgeting? (1.5 pts)
We concentrate on free cash flows because they are what make-up the value of the shareholders’ claim on the company’s assets. The shareholders are the owners of the company and our objective is to make them better-off. Free cash flow is what is left over for shareholders from the operating cash flow after taxes, interest, and new investment has been made. By singling-out the cash flow left over for the owners, we are able to focus on what is important in adding value to the firm.