Evaluation of Capital Budgeting Proposals is based on Cash Flows because:

(c) Cash is more important than profit,

Option C is appropriate answer.

Answer C is correct

Cash flows are important than profits 

Answer is d. None of the above

Because the Cash Flows can be discounted to take care of the time value of money.

Evaluation Techniques Of Capital Budgeting

Capital budgeting is making long-run planning decisions for investment in project. Evaluation techniques of capital budgeting can be classified into two categories.

1. Traditional Methods

2. Discounted Cash Flow Methods

1. Traditional Methods

Traditional method does not consider the time value of money. It assumes that present value is equal to future value. Traditional method is also known as on discounted or unsophisticated method. There are two methods of evaluation:

i) Pay Back Period (PBP)

ii) Accounting Rate Of Return (ARR).

2. Discounted Cash Flow Methods

Discounted cash flow method is based on the concept of the time value of money. It is more practicable concept of decision making. The discounted cash flow method assumes that present value of any amount is not equal to future value. The present value is much more worth than future value. So, before evaluating any project, first of all the estimated cash flows must be converted into present value. To convert into present value from the future value is known as discounted value. On the basis of discounted value, it makes decision. So, it is known as discounted cash flow method. The following methods are used under discounted cash flow method:

i) Net Present Value (NPV)

ii) Profitability Index (PI)

iii) Internal Rate Of Return (IRR)

The most important thing is to profit from the cash-C is the correct answer

(c) Cash is more important than profit, The correct answer

Dear All,

Everybody saying answer c. But, Mr .Vonod Jetley made only  detailed narration. Anybody can help me out

about the clarity related to the question along with answer.

Expecting answer from Mr.Venkitaraman as well as  Mr.DivyeshPatel.

Regards

Joshi Mathew

CIA #1036906

Ans C.   Cash and  Cash-to-Cash Cycle are more important than profit.  Even without profit a sale can be effected, i.e. just  recovering the cost!!!  Hence cash is important.

I would say D is the answer.

Capital Budgeting does not relate to the comparison between cash and profit

Capital budgeting is just a tool of assessing the attractiveness of a long term investment based on "judged" cash flows. Profit is considered after assessment by decision makers.

C, does not really show why cash is used!

A and B, are just not true. 

A capital project is a major nonrecurring expenditure that's required to purchase or construct a facility or equipment, which inevitably leads to a loss of liquidity. A capital budget is a formal plan to expend the resources necessary to acquire or create the fixed asset that's the subject of the capital project, which is intended to contribute to the achievement of an organization's strategic plan. An organization's management evaluates and ranks alternative capital investments using the capital budgeting process in order to make optimal investment decisions. The investment proposals are evaluated in terms of the profits the project is expected to generate, the timing of the forecasted cash inflows, the potential for a high return on the investment that can be subsequently used to fund the organization's growth and the major expenditures required to fund the project. Based on the ranking of the investment alternatives, the company selects the most desirable projects to finance.