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How do we determine if cash flows are relative to the capital budgeting decision?

How do we determine if cash flows are relative to the capital budgeting decision?
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Answer #1

Cash flows are relative to capital budgeting decision in following ways:

1) Payback period i.e the time taken to recover the initial investment is based on the cash flows generated from the project. Payback period is calculated as present value of cash outflows/ Annual cash inflows

2) Net presnt value is determined to decide the capital budgeting . NPV of the prject is calculated as present value of cash inflows - present value of cash outflows.

3) Management has to decide whether they are having sufficient funds to take capital budgeting decisions or not .

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