COMM 203 Lecture Notes - Lecture 3: Operating Cash Flow, Capital Structure, Pro Forma
Document Summary
The cash flows that should be included in a capital budgeting analysis are those that will only occur (or not occur) if the project is accepted. The stand-alone principle allows us to analyze each project in isolation from the firm simply, by focusing on incremental cash flows. Project stands on its own merits, isolated from other opportunities. We should ask: will this cash flow occur (or not occur) only if we accept the project? . If the answer is yes , it should be included in the analysis because it is incremental. If the answer is no , it should not be included in the analysis because it will occur anyway. If the answer is part of it , then we should include the part that occurs (or does not occur) because of the project. Relevant versus irrelevant cash flows: sunk costs (irrelevant)
