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The estimated benefits from a project are expressed as cash flows instead of income flows because: a) This is required …
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The estimated benefits from a project are expressed as cash flows instead of income flows because:
a) This is required by the tax authority.
b) This is required by the Securities Commission.
c) It is cash, not accounting income that is central to the firm’s capital budgeting decision.
d) It is simpler to calculate cash flows than income flows.
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2023-03-15T10:00:11+00:00
2023-03-15T10:00:11+00:00 1 Answer
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c) It is cash, not accounting income that is central to the firm’s capital budgeting decision.
The estimated benefits from a project are expressed as cash flows rather than income flows because the goal of capital budgeting is to evaluate the potential profitability of long-term investments. In capital budgeting, the focus is on cash flows rather than accounting income because cash flows represent the actual inflows and outflows of cash related to the investment.
Cash flow analysis is essential in capital budgeting because it considers the time value of money, which means that a dollar received in the future is worth less than a dollar received today. Cash flows also reflect the liquidity of the investment and the ability of the project to generate sufficient cash to pay for itself and provide a return on investment.
In contrast, income flows are based on accounting conventions and may not accurately reflect the actual cash inflows and outflows of the investment. Therefore, expressing the benefits of a project as cash flows is essential in evaluating the profitability and viability of long-term investments.