Question

True or False: if a cash flow happens whether the firm takes the project or not, this cash flow is considered incremental and should be included as (part of) the project's cash flow.

Answer 1

It's false that a cash flow that occurs regardless of a new project is considered incremental; such cash flows should not be included in the project's cash flow analysis.

Step-by-step explanation:

False. If a cash flow occurs regardless of whether the firm takes on a new project or not, it is not considered incremental and should not be included in the project's cash flow analysis. Incremental cash flow refers to the additional or extra cash flow a firm receives from undertaking a project. Therefore, only cash flows that are directly attributable to the project's operations should be considered. These are the cash flows that would not occur if the project were not undertaken. For example, in the context of reinvestment, profits that are reinvested into the firm to improve or expand facilities, purchase technology, or hire additional labor would typically generate incremental cash flows, as these investments can lead to additional sales and profits that would not have been possible without the project.