Relevant Cash Flows and Incremental Analysis
Which Cash Flows Should Be Included?
Only incremental cash flows that result directly from accepting the investment should be considered. Sunk costs are excluded because they cannot be changed.
- Include additional revenues.
- Include additional operating costs.
- Include tax effects when applicable.
- Include salvage value and working capital recovery.
- Exclude sunk costs.
Note
Opportunity costs should be included whenever an existing resource has an alternative use.
Summary
Capital budgeting focuses on future incremental cash flows rather than historical expenditures.