Question

Identify and explain the relevant cash inflows and outflows for capital budgeting decisions.

Answer 1

Relevant Cash inflows

Relevant cash inflows are the savings and other cash inflow that arise on account of capital budgeting. Following are the relevant cash inflows

• Operational savings
• Tax Shield on Depreciation
• Salvage value ( after tax)
• Release of working capital

Relevant Cash outflows

Relevant cash outflows are the outflows that arise on account of capital budgeting. Following are the relevant cash outflows

• Initial capital investment
• Working Capital needed
• One time costs like training cost, etc
• Operational expenses
• Tax on Income

Both relevant cash inflows and outflows are discounted at the cost of capital to arrive at net present value or Internal rate of return. If the net present value is positive the project is accepted and if the net present value if negative the project is rejected.