Briefly discuss why financial decision makers must focus onincremental cash flow
admin / July 3, 2018
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Briefly discuss why financial decision makers must focus onincremental cash flows when evaluating new projects.As per Principle 3: CashNot ProfitsIs King and Principle 4:IncrementalCash FlowsIts only what changes that counts we should focus onfree cashflowsthat is the incremental or different after-tax cash flowsattributed to theinvestment proposal. We focus on cash flows rather thanaccounting profitsbecause these are the flows that the firm receives and canreinvest. Only byexamining cash flows are we able to analyze the timing of thebenefit or costcorrectly. Also we are only interested in these cash flowson an after-tax basis asonly those flows are available to the shareholder. Inaddition it is only theincremental cash flows that interest us because looking at theproject from thepoint of the company as a whole the incremental cash flows are themarginalbenefits from the project and as such are the increased value tothe firm fromaccepting the project.
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