Final answer:
Managers need to only consider cash flows that are relevant to the project.
Step-by-step explanation:
When making capital budgeting decisions, managers need to only consider cash flows that are relevant to the project.
Relevant cash flows are those that are directly related to the project and can be attributed to it. These include the initial investment required, the expected future cash inflows, and the anticipated costs. In contrast, managers should ignore sunk costs, which are costs that have already been incurred and cannot be recovered.
For example, if a company is considering investing in a new manufacturing facility, the relevant cash flows would include the cost of purchasing land, constructing the facility, and operating expenses. On the other hand, sunk costs such as the expenses incurred during the feasibility study or the salaries of employees involved in the decision-making process should not be considered.