The definition, identification, and measurement of cash flows relevant to project relevant cash flow is one which will change as a direct result of the decision about a relevant cash flow is one which will change as a direct result of the decision about a project. | Chapter 2: Project Cash Flows The definition, identification, and measurement of cash flows relevant to project evaluation. Why Cash Flows? Cash flows, and not accounting estimates, are used in project analysis because:- They measure actual economic wealth. 2. They occur at identifiable time points. 3. They have identifiable directional flow. 4. They are free of accounting definitional problems. The Meaning of RELEVANT Cash Flows. A relevant cash flow is one which will change as a direct result of the decision about a project. A relevant cash flow is one which will occur in the future. A cash flow incurred in the past is irrelevant. It is sunk. A relevant cash flow is the difference in the firm’s cash flows with the project, and without the project. Cash Flows: A Rose By Any Other Name Is Just as Sweet. Relevant cash flows are also known as:- Marginal cash flows. Incremental cash flows. Changing cash flows. Project cash flows. Project Cash Flows: Yes and No. YES:- these are relevant cash flows - Incremental future sales revenue. Incremental future production costs. Incremental initial outlay. Incremental future salvage value. Incremental working capital outlay. Incremental future taxes. Project Cash Flows: Yes and No. NO:- these are not relevant cash flows - Changed future depreciation. Reallocated overhead costs. Adjusted future accounting profit. The cost of unused idle capacity. Outlays incurred in the past. Cash Flows and Depreciation: Always A Problem. Depreciation is NOT a cash flow. Depreciation is simply the accounting amortization of an initial capital cost. Depreciation amounts are only accounting journal entries. Depreciation is measured in project analysis only because it reduces taxes. Other Cash Flow Issues. Tax payable: if the project changes tax liabilities, those changed taxes are a flow of the project. Investment allowance: if a taxing authority offers this ‘extra depreciation’ concession, then its tax savings are . | Chapter 2: Project Cash Flows The definition, identification, and measurement of cash flows relevant to project evaluation. Why Cash Flows? Cash flows, and not accounting estimates, are used in project analysis because:- They measure actual economic wealth. 2. They occur at identifiable time points. 3. They have identifiable directional flow. 4. They are free of accounting definitional problems. The Meaning of RELEVANT Cash Flows. A relevant cash flow is one which will change as a direct result of the decision about a project. A relevant cash flow is one which will occur in the future. A cash flow incurred in the past is irrelevant. It is sunk. A relevant cash flow is the difference in the firm’s cash flows with the project, and without the project. Cash Flows: A Rose By Any Other Name Is Just as Sweet. Relevant cash flows are also known as:- Marginal cash flows. Incremental cash flows. Changing cash flows. Project cash flows. Project Cash Flows: Yes and No. YES:- these
