Question

Why does capital budgeting rely on analysis of cash flows rather than on net income?

Short answer

Capital budgeting dependent upon the cash flows in place of net income because net income includes the non-cash expenses and non-cash revenues.

Step-by-step solution

Definition of net income

Net income is the situation during the accounting period when the revenue earned by the company is more than the expense incurred by the company to earn those revenues.

Cash flow is more important than net income

Capital budgeting gave more importance to the cash flows than the net income because main motive of the capital budgeting techniques to determine the cash generated by the project in dollar value. But net income is lack to provide the exact and accurate value of the cash generated because it includes the cash transactions as well as non-cash transactions. So, Capital budgeting rely on the cash flows than net income.