Capital budgeting decisions are based on free cash flow because free cash flow better reflects when money is received and available for reinvestment than account profits.

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Free cash flow is considered more accurate than accounting profits for capital budgeting decisions because it takes into account the timing of cash inflows and outflows, and reflects the cash available for reinvestment in the business. In contrast, accounting profits can be manipulated by non-cash items and do not necessarily represent the actual cash flows of the business.

Capital Budgeting Decisions Are Based on Free Cash Flow Because