Relevant Cash Flows

What is a relevant cash flow for a project? The general principle is simple enough: a relevant cash flow for a project is a change in the firm's overall future cash flow that comes about as a direct consequence of the decision to take that project. Because the relevant cash flows are defined in terms of changes in, or increments to, the firm's existing cash flow, they are called the incremental cash flows associated with the project.

The concept of incremental cash flow is central to our analysis, so we will state a 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.

stand-alone principle

The assumption that evaluation of a project may be based on the project's incremental cash flows.

This definition of incremental cash flows has an obvious and important corollary: any cash flow that exists regardless of whether or not a project is undertaken is not relevant.

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  • carita inberg
    What are the relevant cash flows?
    8 years ago

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