COMM 308 Chapter 10: CH 10
7 Apr 2017
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Undertaking a project changes the firm"s overall cash flows today and in the future. To evaluate a proposed investment, we have to evaluate these changes in the cash flow and decide whether they add value to the firm. The most important step is deciding which cash flows are relevant and which aren"t. Incremental cash flows the difference between a firm"s future cash flows with a project and without the project. The concept of incremental cash flow is central to our analysis, so we state the general definition and refer back to it as needed: The incremental cash flows for project evaluation consist of any and all changes in the firm"s future cash flows that are a direct consequence of taking the project. What"s important any cash flow that exists regardless of whether or not a project is undertaken is not relevant.
