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Capital budgeting is the process of choosing the investments and assets for longterm business development. Busineses rely on capital budgeting to supply it with an inflow of cash.Financers use cash flows instead of accounting profits in their calculations.
Capital budgeting decisions should be based on cash flows. Calculating with cash basis offers a way to evaluate a capital budget in real life. People often wonder why capital budgeting is based on cash flows, mainly because much of a company's financial health is usually based on profits.
The main reason for this is that accounting followed mostly in the world is done on an accrual basis. This means that some profits and expensese are not factored into the finances until the end of the company's accounting cycle. This is the reason why capital budgeting should not follow accrual basis of accounting.
Cash basis. Accrual is only associated with the operating activities.
Simple Cash basis
Cash basis accounting and accrual basis accounting both have their place in decision making.
1) Because only cash flows can be invested, we use cash basis income when dealing with time value of money concepts.
2)The income statement is where we find operating activities reported under the accrual basis of accounting, Amounts in the operating activities section of the statement of cash flows represent the same activities but on a cash basis.
We must convert accrual basis net income to cash basis income before making capital budgeting decisions under the NPV and IRR methods
i think we should use cash basis
Answer is Cash basis
cash basis approach
