Relevant cash flow

Based on the image you provided, here is an easy-to-understand elaboration of "The Relevant Cash Flows":

The core idea of "relevant cash flows" is to figure out exactly what money is coming in and going out because of a specific project you're thinking about starting. It's not about the company's total cash flow, but only the change that the new project will cause.

Let's break down the points:

1. "The incremental after-tax cash outflow (investment) and resulting subsequent inflows associated with a proposed capital expenditure."

* "Incremental" means "the extra amount." So, we're looking for the extra cash that will be spent or earned because of this project.

* "After-tax" is crucial. Businesses pay taxes. The real profit or cost of a project is what's left after you've paid the government. So, we need to calculate the cash flows after factoring in taxes.

* "Outflow (investment)" is the money you have to spend to get the project started. This is your initial cost.

* "Subsequent inflows" are the money the project will bring in later on. These are the revenues and savings that the project generates.

* "Capital expenditure" is just a formal term for a big purchase or investment, like buying a new machine or building a new factory.

So, this point is saying that the relevant cash flows are the initial investment you have to make (the outflow) and all the money the project will generate for you later (the inflows), all calculated after accounting for taxes.

2. "A relevant cash flow for a project is a change in the firm's over all future cash flow that comes about as a direct consequence of the decision to tax."

* This point reinforces the idea of "incremental" or "change."

* "A change in the firm's overall future cash flow" means you're comparing two scenarios:

* What the company's total cash flow will be without the project.

* What the company's total cash flow will be with the project.

* The difference between these two numbers is the relevant cash flow. It's the change that's a "direct consequence" of doing the project. You should only count cash flows that happen because of the project.

3. "The incremental cash flows represent the additional cash flows. (Outflows or inflows) expected to result from a proposed capital expenditure."

* This is a simple summary of the first two points.

* "Incremental cash flows" are the "additional" cash flows.

* These can be money going out (outflows, like buying new materials) or money coming in (inflows, like new sales revenue).

* The key is that these are the extra bits of cash flow that wouldn't exist if you didn't do the project.

In simple terms: When a company is deciding whether to do a new project, they don't look at their total revenue or total expenses. They only focus on the extra money the project will create or the extra costs it will cause. These "extra" cash flows—both good and bad—are the "relevant cash flows" for making the decision.