Capital budgeting is the process of identifying, analyzing, and selecting investment projects whose cash flows will all be received within one year. A capital investment involves making a current cash outlay in the expectation of future benefits. It could be said that a firm's future success depends on its capital investments. A project's contributions to net income over time constitute the primary potential benefits of investment in the project. All anticipated cash coming into or going out of the firm as a result of a capital investment should be used in capital budgeting decisions.
Depreciation increases taxable income.
For tax purposes, firms generally prefer the straight line to an accelerated depreciation method. One step in calculating cash flows often involves adding depreciation to net income. Used by permission. All rights reserved.