The more sophisticated capital budgeting models require a comparison of the current cost expenditure to obtain the fixed asset against a future stream of funds coming to clubs. In order to compare current year expenditures to future years' cash streams, the future years' cash streams must be placed on an equal basis. The process for accomplishing this involves discounting the future cash flows thus recognizing the time value of money. Time is expressed years, as long as an annual interest rate is used. The interest rate is expressed in decimal form.
Most capital investments provide a stream of cash receipts for several years.
When the amounts are equal at equal intervals, such as the end of each year, the stream is referred to as an annuity. In most capital budgeting decisions, an investment is made only when the future cash flow from the investment justifies the expenditure. Therefore, the concern is with the cash flow from the proposed investment. From the club's perspective, the incremental cash flow is the focus rather than the operation's total cash flows. Incremental cash flow is simple the change in the cash flow of the operation resulting from the investment.