Capital Budgeting: From Accrual to Cash Flow

Core Focus: This topic involves applying Net Present Value (NPV) calculations to real-world scenarios, moving beyond stylized examples to the detailed formulations, measurement, and calculations involved.
Introduction to Accounting: A necessary component is a mini-introduction to accounting principles, particularly understanding the difference between accrual accounting and cash flows.
- Finance Perspective: From a finance perspective, we value cash flows – when cash is actually received or paid out.
- Accrual Accounting: This is the basis for most professional accounting (e.g., income statements, balance sheets of public companies).
  - It has specific rules that often obscure the actual timing of cash inflows and outflows.
  - Reported earnings in accrual accounting do not necessarily correspond to true cash flow.
  - Therefore, work is needed to convert reported accrual accounting data back into cash flows for financial analysis.
Future Topics (Upcoming Lecture):
- Impact of depreciation on cash flows.
- Working capital changes and their effect on cash flows.
- Alternative project valuation methods to NPV that are used in practice.

Focus: Making decisions related to real assets – how to make capital budgeting decisions about changes in the real assets or operations of the firm.
Fundamental Question: