Accounting profits are used to make capital budgeting decisions because generally accepted accounting principles ensure that profits are the best measure of a company's economic activity.

Question

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While accounting profits are important in measuring a company's financial performance, they do not always accurately reflect the economic reality of a project or investment. Capital budgeting decisions rely on cash flows and other financial metrics, such as net present value and internal rate of return, in order to accurately evaluate the potential return on investment.

Accounting Profits Are Used to Make Capital Budgeting Decisions Because