Which of the following rules is essential for successful cash flow estimates, and ultimately, to successful capital budgeting?
A) The return on invested capital is the only relevant cash flow.
B) Only incremental cash flows are relevant to the accept/reject decision.
C) Total cash flows are relevant to capital budgeting analysis and the accept/reject decision.
D) Inflation is considered while estimating incremental cash flows.
E) Shipping and installation costs are included in cash flow estimation.

Question

Quizplus · Accepted Answer

Only incremental cash flows are relevant to capital budgeting because the decision to accept or reject a project is based on the additional cash flows that will result from the investment, not on total cash flows. Therefore, all costs and benefits that result directly and exclusively from the investment should be included, while sunk costs and overheads should be excluded. The return on invested capital is important, but it should be calculated based on incremental cash flows. Inflation should be considered while estimating incremental cash flows, but shipping and installation costs may or may not be included, depending on the specific circumstances of the project.

Which of the Following Rules Is Essential for Successful Cash