Question.2663 - Why does capital budgeting rely on analysis of cash flows rather than on net income?
Answer Below:
There are several reasons why capital budgeting relies on analyzing cash flows rather than on net income. Cash flows provide a clear understanding of the financial impact by allowing decision-makers to focus on the actual cash transactions related to the investments. From the business perspective, cash is said to be king because it provides a more accurate result of the project's liquidity and ability to generate some money to cover expenses (Hamdan et al.,2018). Net income is an accounting measure that includes non-cash items such as depreciation, whereas cash flow represents the actual inflows and outflows of cash over time. References Hamdan, K. H., Bachay, I. R., Flayyih, H. H., & Talab, H. R. (2018). Using capital budget and sensitivity analysis to predict future cash flows and evaluate investment projects: Empirical study at Iraqi company for production, marketing and meat and field crops. Journal of Engineering and Applied Sciences, 13(24), 10510-10516.More Articles From Finance
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