Explain why the timing and quantity of cash flows are important in capital investment decisions.

Question:

Explain why the timing and quantity of cash flows are important in capital investment decisions.

Capital investment decisions

The process under which the management decides how the funds will be allocated and utilized in the organization is known as "capital investment decisions". For example, what assets are important to purchase at a particular point in time.

Answer and Explanation:

In capital investment decisions, timing and quantity are the most important factor because a company has to decide the amount of investment of capital. It is important to have knowledge of timing according to the market conditions because they have to calculate the present or actual value of the project. Quantity also matters in the cash flow. For analyzing the acceptation or rejection of the project, it is important to regulate the present value factor. It helps the small business owner to adjust the cash according to the situations.

Organizations should have enough cash available if future situations arise to pay any investor on an urgent basis or if the company wants to invest in other projects. Because of this, it is important to know the timing and quantity of cash flow.


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Using the Statement of Cash Flows for Decision Making

from Accounting 101: Financial Accounting

Chapter 12 / Lesson 5
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