Why does capital budgeting use net cash flows rather than net income?

Missmallprincess --

The perfect resource for explaining this is in the Merrill Lynch
booklet that's been in print since 1973 and is online here:

Merrill Lynch
"How to Read a Financial Report" (undated)
http://philanthropy.ml.com/ipo/resources/financial.html

A capital budget requires cash to finance it -- even if a portion of
the cash is being borrowed.

Net income statements include many things that are non-cash items:
depreciation being the lead example.  It's a deduction from net income
-- but actually adds to cash flow in any place where taxes are
deductible (which is virtually everywhere).  Net income will also be
reduced by non-cash items (accrued vacation that's not yet been paid).

And even "sales" can be non-cash items if a company is accruing
portions of long-term contracts or not being paid.  Another accounting
trick that reduces sales and income -- but can contribute
significantly to a company's position is the sale of things like cash
cards.  When Starbucks sells you a card for $10 the money goes in the
corporate treasury but the company can't take it as a sale or a
contributor to income until you actually USE the card.

Google search strategy:
"How to read a financial report"
"components of net income"

Best regards,

Omnivorous-GA