Capital Budgeting Reliance on Analysis of Cash Flows
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1. Why does capital budgeting rely on analysis of cash flows rather than on net income?
2. What is normally used as the discount rate in the net present value method?
3. Have you ever heard of the replacement decision?
4 Does capital budgeting deals with actual dollars?
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1. Why does capital budgeting rely on analysis of cash flows rather than on net income? could you provide an example to illustrate the (your) points.
The investment decisions of a firm are generally known as the capital budgeting, or capital expenditure decisions. The firm's investment decisions would generally include expansion, acquisition, modernization and replacement of the long-term assets. Sale of a division or business (divestment) is also as an investment decision.
Decisions like the change in the methods of sales distribution, or an advertisement campaign or research and development programs have long-term implications for the firm's expenditures and benefits, and therefore, they should also be evaluated as investment decisions. Several different procedures are available to analyze potential business investments. Some concepts are better than others when it comes to reliability but all provide enough information to get the general scope of the investment. The five procedures that provide useful information are the Net present Value (NPV), the Payback Rule, the Average Accounting Return (AAR), the Internal Rate of Return (IRR), and the Profitability Index (PI). These ...
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