Cash flows are better than accounting profit

Cash flows are better than accounting profit because accounting profit can be manipulated with the help of accounting policies whereas the little can be done with cash flows.

The user can understand the cash flow more easily than accounting profit as accounting profit involves many technicalities where the cash flow are prepared on simple concept of cash inflows and cash flows. This simple concept improves the understanding of user.

 Cash flow give a better view of organization activities that where the cash is being spent.it also give an idea that how the cash is being generated by the organization. Therefore cash flow give you an ideas about the strength of organization.

Cash also give you an idea about the liquidity position of the entity. The liquidity is important factor to support operations. This sufficient funds give a confidence to equity holder that entity have sufficient fund to run its operations.

Cash flow also give a long term direction of the organization by pattern of expenditure. if entity investing in fixed assets and launching new project it means that entity has long term growth strategy but if entity in investing in working capital it means that entity is more focused on existing business.

Cash flow also put a light on important payment like interest , loan and dividend. if the organization is paying these amount this shows the organization ability to fulfill its commitment and there is no apparent reason of default.

Advantages of IRR

IRR

IRR stands for Internal Rate of Return and this is a stage whether NPV become Zero. The internal rate of return is compared with the cost of capital and if the irr is greater than cost of capital then project may be accepted.

Advantages of IRR

• Based on Cash flow
• Relatively easier to calculate than NPV
• Mutually exclusive project can not be explained

Divisible and Non Divisible Project

Divisible Projects:-

The divisible project mean that company can take some part of project. it means that some project are completed in full and other is taken in part. This concept is maximize utilization of fund in fact full utilization of fund.
There is process to select the projects

1. The Profitability index of each project is calculated
2. on the bases of profitability index calculation projects will be ranked.
3. Select a combination with maximize the NPV

Non Divisible Project:-

The project can be undertaken or refused . The project can not be undertaken into parts.

1. Work out the possible combination
2. Select a combination to maximize NPV

Discounted Cash Flows

Advantages of Discounted Cash Flows
There are two main advantages of cash flow

1. It is calculated on the bases of future cash flow which are more difficult to manipulate than accounting profit.

 2.This method takes into account the time value of money which is important aspect of decision making for future investment.