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

1- 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

NPV is mostly calculated using forecasted cash flows instead of accounting earning prediction.

Accounting data is from where the expected future cash flows are arrived. If a machine has been bought for $10,000 and the entire amount has been paid the same day then the NPV must include the entire $10,000 as cash outflow. Predicting the future cash flows from a project is comparitively easier and it is also understood that the forecasted cash flows will not be 100% accurate but at least there is some basic understanding on what is being forecasted.

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