The fundamental question for consideration here is, “How is management to choose from among these so many possible alternatives so as to maximize the present value of the expected future cash flows?” The answer to this question is indirect. Each potential alternative will have different cash consequences and change continuously with time. Therefore, analyzing the differences between available alternatives is essential to good decision-making. This analysis is called ‘differential’ or ‘incremental’ cash analysis. This basically gives managers an overlook of the advantages and disadvantages of the choice of alternatives. The final decision is to accept the alternative with the greatest net present value or cash flow, i.e. NPV

Stage 5, 6 and 7 : The decision making and control processes

Stage 5 is the forecasting stage in which it predicts the most likely outcome of a decision, expressed in a budget form. The budget is prepared on estimates of differential costs and revenues in the chosen course of action with some valid assumptions.

Meeting budget targets can be implemented by monitoring the actual performance, this is known as the control process. This is illustrated in stage 6 and 7. Regular control reports provide a useful feedback for management to assess the progress so far.