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Empirical observations show that capital budgeting cash flow analyses or projections are not commonly used in...

Empirical observations show that capital budgeting cash flow analyses or projections are not commonly used in practice especially among small firms, which often prefer to use accounting numbers instead. What is the most likely explanation of this behavior? Do you think this is appropriate? Explain

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Answer #1

small firms generally do not opt with capital budgeting process through estimation of the cash flow because they do not have an optimum mechanism for projection of the future cash flows related to project as they are provided with less capital and it is an experts work to project the optimum future cash flow related with the project and it needs a special mechanism and process so small firms are not able to finance with those experts to decide with the future cash flow.

Capital budgeting is a complex process which involves a large degree of financial forecasting in order to project the future cash flow related to a project and it is too costly for a small firm to bear.

Hence they stick to accounting numbers and they decides their capital budgeting should be based upon accounting numbers.

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