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Should a company focus on cash flows or accounting profits when making a capital expenditure decision?

Author:
Harold Averkamp, CPA, MBA

Using the incremental cash flows and discounting them to reflect the time value of money is the preferred method. The two most common techniques involved in discounting cash flows are net present value and internal rate of return.

While the discounted cash flow models are the ideal, I would also want to forecast or project the impact on the company’s future financial statements. Therefore, I would also calculate and understand the effect on the accounting profits resulting from the capital expenditure.

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About the Author

Harold Averkamp

For the past 52 years, Harold Averkamp (CPA, MBA) has
worked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online. He is the sole author of all the materials on AccountingCoach.com.

Learn More About Harold

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