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Why financial analysts use cash flows prediction instead of accounting earnings prediction in estimating the NPV...

Why financial analysts use cash flows prediction instead of accounting earnings prediction in estimating the NPV of a project?

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Answer #1

Because earnings are not an accurate measures of true cash generated by the business because earnings includes many non cash income and expenses such as depreciation which makes earnings vulnerable to the manipulation from the company management. On the other side, cash flow is a true measure as it adjust for all one time income/expenses as well as non cash income and expenses so we get cash flow which is available after meeting all operational and capital investment requirements.So cash flows is used instead of accounting earnings,.

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