ABSTRACT
The use of adjusted projected profits seems to be accepted as a valid basis for investment appraisal. When using either of the discounting methods of investment appraisal -net present value - it is cash flows and their timings which must be taken into account. The logic for the working capital adjustment is that cash flows tend to lag their accounting cash flow counterparts by a period which will vary from one project to another; perhaps a period of two or three months is typical. When undertaking capital investment appraisal, future cash flows should be discounted at the point in time which they are expected to occur. When using net present value and rate of return it is incorrect to use accounting profits as a substitute for cash flows. Profit represents the difference between revenues and expenses, which are not the same as cash received and cash paid.
