Case Study: Deutsche Brauerei (DB) - Essay Example

A company’s better measure of performance is the value that it creates for its shareholders. This value is derived by measuring the cash flow of the company, instead of just accounting profits. The major rule for capital budgeting in order to measure the implication of a certain project on shareholders’ wealth is to measure the cash flows and cash flow timings, not accounting profits. Deutsche Brauerei should give more emphasis on its cash flow activities rather than accounting profits, as these provide more information as regards the value that a project creates for a firm.

Cash flow should be given more emphasis than accounting profits when Deutsche Brauerei evaluates investment projects. When measuring the company’s performance, cash flow is a better measure in order to assess the value that the firm contributes to its shareholders’ wealth. “In order to measure the true effects of our decisions, we will analyze the benefits and costs of projects on an incremental basis, which related directly to Principle 4: Incremental Cash Flows—it’s only what changes that counts.

In effect, we will ask ourselves what the cash flows will be if the project is taken on versus what they will be if the project is not taken on (Keown 2005, 328).” When the firm decided to pursue the Ukrainian project, the company does not account for the opportunity costs, such that it measures the cash flow without the project and the cash flow with the project in order to determine the incremental cash flows from the investment. In assessing projects that involve capital budgeting, it is the incremental cash flows that counts.

The company is likely to repeat this violation in its investment expenditure plan for 2001 and 2002. The incremental cash flows which are relevant to the decision of investing in capital expenditures are the incremental cash