Capital budgeting decisions must be based on net income to determine if the investment is to create value for the firm.

Question

Quizplus · Accepted Answer

Capital budgeting decisions must be based on cash flows, not net income, to determine if the investment will create value for the firm. Net income can be affected by non-cash items such as depreciation and amortization, which do not represent actual cash inflows or outflows. Therefore, cash flow-based analysis such as net present value (NPV) and internal rate of return (IRR) are used to evaluate capital budgeting decisions.

Capital Budgeting Decisions Must Be Based on Net Income to Determine