Capital Budgeting: Incremental Cash Flows, Costs, and Tax Shields

Incremental Cash Flows

Difference between a firm's future cash flows with and without the project

Stand-alone Principle

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

Sunk Cost

A cost that has already been incurred and cannot be removed and therefore and isn't part of an investment decision

Opportunity Cost

The most valuable alternative that is given up if a particular investment is undertaken.

Erosion

The cash flows of a new project that come at the expense of a firm's existing projects.

Pro Forma Financial Statements

A Projects future years operations.

Accelerated Cost Recovery System (ACRS)

A depreciation method under U.S. tax law allowing for the accelerated write-off of property under various classifications.

Depreciation Tax Shield

The tax saving that results from the depreciation deduction.

Equivalent Annual Cost

The present value of a project's costs calculated on an annual basis.