Conflict Between Discounted Cash Flow (DCF) Analysis and Accrual Accounting

question 42

Essay

Conflict between discounted cash flow (DCF) analysis and accrual accounting
A capital investment project was approved based on a well-done DCF analysis. After the initial investment, the expected cash flows of the project were negative for the first two years, small but positive for the next two years and then very large for the last four years. The cash flows were in the form of saving of costs, not additional revenues.

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Definitions:

Average Variable Cost

The cost variable per unit of output produced, calculated by dividing total variable costs by the quantity of output.

Economic Losses

The reduction in financial wealth, goods, or services that results from an event or decision.

Long Run Market Supply Curve

A curve showing the relationship between the price of a good and its supply over a longer period, when all input factors can be varied.

Limited Quantities

A restricted amount of a product or resource available for consumption or use.