The calculation and use of cash flows in capital investment appraisal
Capital investment appraisal helps a business decide whether a large purchase is worth making. It uses cash flows — the actual money moving in and out — not accounting profit.
Formula
Net Cash Flow = Cash Inflows − Cash Outflows
Real World
When Tesco evaluates building a new superstore for £40 million, it forecasts the actual cash from weekly sales minus cash costs like wages and stock — ignoring non-cash items like depreciation — to judge whether the store will generate enough real money over its lifetime.
Exam Focus
Explain clearly why cash flows are used instead of profit — examiners award marks for mentioning exclusion of non-cash items like depreciation.
Essay Framework
Use PEEL to structure every paragraph. Tap each step for guidance and an example.
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