7a. Explain how the cash inflows and outflows forecast for use in a cash budget differ...

7a. Explain how the cash inflows and outflows forecast for use in a cash budget differ from those forecast for use in a capital budgeting analysis.

b. Explain how the purpose of the cash budget forecast differs and from that of the capital budgeting forecast, and why differences identified in part a are appropriate given the difference in purpose.

Expert Solution

a. Capital Budgeting is used in the event of a large investment where in the returns are expected over a number of years. Thereafter those returns are converted to their present values considering the appropriate cost of capital and their net present value is determined.

On the other hand, Cash inflows and outflows forecast can be for Revenue, Cost and other related income and expenses. Supposing we have to calculate net cash flows for the next five years, then we need to consider all sources of cash flows which emanate from Revenue, cost & other sources.

Capital Budgeting is used only in the event of investment whereas cash inflows & outflows forecast are used on a regular basis.

b. Cash Budgeting basically is an assessment of possible sources of cash inflows & outflows against company’s various Revenue & cost drivers to determine how much cash would be left with the company in near future.

ekkarill92 answered 2 years ago

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