Question

What are the attributes of the cash flow that are used in the capital budgeting process and why are they important to the analysis? (Hint, one of them is net working capital addition).

Answer 1

Capital projects are those where the cash flows are received by the business over long periods of time which often exceeds a year. A cash flow is an important element of accounting flows, and specifically vital to understanding capital budgeting. The main aspects of cash flow that impacts capital budgeting are sunk costs and externalities. Both of these costs cannot be avoided. Sunk costs are costs which are unavoidable, even when the project is undertaken. However the external factors that can impact the implementation of the project of the company and eventually the company's cash flow need to be fully considered while preparing/planning the capital budgeting.

answered by: anonymous