Accounting Income and Cash Flow? Which Do

¶ … accounting income and cash flow? Which do we need to use when making decisions by using NPV? Explain in short. Accounting income takes in consideration total profits; which is usually some form of total revenues minus total expenses. Cash flow is a totally different concept because it doesn't necessarily account for total income, rather it just accounts for cash out flows and in flows.

For example, it may not account for various administrative costs or wages that are paid to employees and it may not account for the total income of the organization but just for one specific project. A positive NPV is a good start -- now we need to take a closer look Forecasting risk: How sensitive is our NPV to changes in the cash flow estimates; the more sensitive, the greater the forecasting risk (explain which conditions we accept the risk for both investors and company point view).

Investors generally make decisions about risk based on their own personal situation. For example, an investor close to retirement may be risk adverse while a younger investor may be more receptive to risk. The company's will also have a unique risk profile based on their current circumstances. However, both the company as well as the individual investor will have to incorporate their risk tolerance into their required rate of return for their NPV calculation.

By adjusting the risk premium in the NPV calculation, both the investor and the company can also adjust 3) Sources of value: Why does this project create value for both invertors and company point view? The project will create value for both the investors as well as the company because the required rate of return is fairly high at twelve percent and the project also has roughly another fifteen thousand in positive NPV.

Thus the company will receive their required rate of return and then there is additional value for the investors that can be split up in a variety of ways depending on the individual circumstances of the relationship between the company and its investors. 4) What happens to the NPV under different cash flow scenarios? We need to take a closer look: Explain what conditions we can accept or reject each of the following case for both invertors and company? 1.

Best case -- high revenues, low costs -- Both the investors as well as the company would accept the following project because it will achieve the required rate of returns with additional surplus value. 2. Worst case -- low revenues, high costs -- This scenario may create mixed interests. Although the NPV is negative, which would deter investors, the IRR for the project still yields over ten percent. Therefore the project may be appealing for the company however there wouldn't be any surplus value to share with investors. 3.

Measure of the range of possible outcomes The range of possible outcomes is primarily driven by the number of unit sales. This range is between 5,500 and 6,500. Since the worst case scenario still yields a 10.3% return on the project, there isn't a substantial amount of risk involved with this project. If there was a negative IRR however, then this would indicate and actual losses incurred to the accounting statements through the summation of the.