Question

Most firms generate cash inflows every day, not just once at the end of the year. In capital budgeting, should we recognize this fact by estimating daily project cash flows and then using them in the analysis? If we do not, are our results biased? If so, would the NPV be biased up or down? Explain.

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Estimating cash flows on a daily basis is not usually done since the cost of estimating cash flows on such basis will exceed its benefits. The results will definitely not reflect its true or most accurate or theoretical value as compared to daily cash flows, but it will not be significantly different (as long as the cash flows are not abnormally spread during the period). Thus, there should not be any bias in the results.

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