When a capital expenditure is proposed, the project must be evaluated and the economic consequences of the commitment of funds determined before it is referred to a budget committee for review or to management for approval. How are the economic consequences described best? This is done in two steps:
First, set up the project in a standard economic model that can be used for all projects, no matter how dissimilar to one another they may be.
Benefits – Costs = Cash Flow
To describe the formula in accounting terminology:
Thus, if the model were stated in a conventional accounting form, it ...