Capital budgeting deals with two components, as has been seen : viz. a present investment as a cost; and a stream future returns as benefits. The essential requirement in this instance is therefore the estimation of future benefits accruing from the investment proposal.
Two approaches are available to quantify the benefits, each leading to the same final figures for any future date of accounting. These are called the accounting profit approach and the cash flow approach. An example is used to illustrate. Consider the following data compiled by the accounting profit approach. Recall that "cash flow" is the sum of profit and depreciation generated by operations.
No comments:
Post a Comment