Accounting Income and Cash Flow? Which Do Essay

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accounting income and cash flow? Which do we need to use when making decisions by using NPV? Explain in short.

Accounting income takes in consideration total profits; which is usually some form of total revenues minus total expenses. Cash flow is a totally different concept because it doesn't necessarily account for total income, rather it just accounts for cash out flows and in flows. For example, it may not account for various administrative costs or wages that are paid to employees and it may not account for the total income of the organization but just for one specific project.

A positive NPV is a good start -- now we need to take a closer look

Forecasting risk: How sensitive is our NPV to changes in the cash flow estimates; the more sensitive, the greater the forecasting risk (explain which conditions we accept the risk for both investors and company point view).

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Investors generally make decisions about risk based on their own personal situation. For example, an investor close to retirement may be risk adverse while a younger investor may be more receptive to risk. The company's will also have a unique risk profile based on their current circumstances. However, both the company as well as the individual investor will have to incorporate their risk tolerance into their required rate of return for their NPV calculation. By adjusting the risk premium in the NPV calculation, both the investor and the company can also adjust

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