Final answer:
The principle of analyzing a project based on incremental cash flows is known as capital budgeting, which relies on calculating the present discounted value to compare current costs with future benefits.
Step-by-step explanation:
The assumption that a proposed project is analyzed based on the project's incremental cash flows is behind the principle of capital budgeting. This principle is the process through which a business evaluates and decides whether to embark on projects such as new facilities or equipment. These decisions often involve spending money in the present with the expectation of future profits, and they rely heavily on the concept of present discounted value. This value is determined by comparing the present costs to the future benefits, which are adjusted for the time value of money. Mathematical models play a crucial role in this process, as they help estimate and normalize costs, such as those arising from materials, fabrication, operation, and maintenance, in order to compare different project alternatives.