COMMERCE 2FA3 Lecture Notes - Lecture 10: Sunk Costs, Accounts Payable, Operating Cash Flow
20 Jun 2016
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Document Summary
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 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. 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. The stand-alone principle stand-alone principle: evaluation of a project based on the project"s incremental cash flows. Sunk costs sunk cost a cost that has already been incurred and cannot be removed and therefore should not be considered in an investment decision. The firm has to pay this cost no matter what.
