Chapter 11, Problem 1RQ

Summary Introduction

To determine: The reason why everyone focus cash flow rather than accounting profit in capital budgeting decision and the reason why we are interested in incremental cash flow rather than total cash flow.

Explanation of Solution

The center is on cash streams instead of profits since these are the real dollar sums that the company gets and can fund. As it were by looking at cash streams are we able to examine the timing of the advantage or charge accurately since bookkeeping benefits are calculated on a collection premise instead of a cash premise. All are fascinated by these cash streams on a post-tax premise since as it were those streams are accessible to the stockholders. In expansion, from the perspective of the firm as an entire, it is as it were the incremental cash streams that intrigued us since the incremental cash streams are the negligible benefits and costs from the extend. As such, they speak to the expanded esteem to the firm from tolerating the venture.