Question

It is important to identify and use only incremental cash flows in capital investment decisions:A) because they are the simplest to identify.B) only when the stand-alone principle fails to hold.C) because ultimately it is the change in a firm's overall future cash flows that matter.D) in order to accommodate unforeseen changes that might occur.E) whenever sunk costs are involved.

Answer 1

Answer:

C) because ultimately it is the change in a firm's overall future cash flows that matter.

Explanation:

Under capital budgeting decisions, decisions are made with respect to addressing the questions like what is the benefit of selecting the project and investing on it.

If the answer to above question is raised income, then the project is selected. Accordingly the raised income in cash terms will be measured by increase in cash flows, that is incremental cash flows.

In simplest terms additional cash flows.