Which of the following best describes why cash flows are utilized rather than accounting profits when evaluating capital projects?
A)Cash flows have a greater present value than accounting profits.
B)Cash flows reflect the timing of benefits and costs more accurately than accounting profits.
C)Cash flows are more stable than accounting profits.
D)Cash flows improve the tax position of a firm more than accounting profits.
E)None of the above.

Question

Quizplus · Accepted Answer

Cash flows are used instead of accounting profits because they take into account the timing of benefits and costs associated with a capital project more accurately. Accounting profits can be impacted by non-cash items such as depreciation which can distort the true profitability of a project. Cash flows, on the other hand, account for the actual inflows and outflows of cash over time, making them a more reliable metric for evaluating the economic viability of a project.

Which of the Following Best Describes Why Cash Flows Are