Capital Budgeting decisions must be based on \"relevant incremental free cash fl

Question

Capital Budgeting decisions must be based on "relevant incremental free cash flows", not "accounting income". Which of the following is not a reason for this? 10. calculating "accounting income", interest expenses are not subtracted out; they are when estimating "relevant incremental cash flows". B. In calculating Net Income, accounting usually subtracts non-cash charges (eg: depreciation & C. D. Cost of fixed assets is a cash outflow, but accounting does not show the purchase of the fixed assets as a amortization expense) from revenues. These are added back in when estimating free cash flows. Changes in Net Operating Working Capital (CA - CL) are not considered when calculating "accounting income", but they are when estimating "relevant incremental free cash flo cost deduction from accounting income. Depreciation Expense "covers the cost" of F

Explanation / Answer

Option A because interest expenses are taken care of in accounting

We consider Working Capital in cash flows but not in accounting approach

Depreciation takes care of cost of purchase of fixed assets but initial investment not accounted for in accounting

Accounting subtracts non-cash charges. These are added back in cash flows.

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