All 34 Capital Budgeting questions
More in Capital Budgeting
What is the time value of money and why does it matter in capital budgeting? What is Net Present Value (NPV) and how do you interpret it? What is the Internal Rate of Return (IRR)? What is the discounted payback period? What is capital rationing? What is the role of residual (terminal) value in appraisal? What is a discount factor and how is it used? What is an annuity and how does an annuity factor simplify appraisal? How does inflation affect capital budgeting, and how is it handled? How does working capital investment feature in project appraisal?
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Budgeting & Forecasting › Capital Budgeting

What cash flows are relevant in capital budgeting?

Intermediate

Answer

Only incremental, future cash flows caused by the decision are relevant: the initial outlay, operating cash flows (incremental revenues less cash costs), working-capital changes, and terminal/residual values. Sunk costs (already incurred) are ignored, and opportunity costs are included. Depreciation is not a cash flow, but its tax effect (tax shield) is.
Real-world example A market-research cost already spent (sunk) is excluded, while the tax saving from depreciation is included.

Common follow-ups: Why exclude sunk costs? | Why include the depreciation tax shield?

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All 34 Capital Budgeting questions