According to the incremental cash flow principle, a firm should:
A)include variable costs and fixed costs.
B)exclude variable costs and fixed costs in the project's cash flows.
C)include variable costs and exclude fixed costs in the project's cash flows.
D)include sunk costs in the project's cash flows.
E)exclude opportunity costs in the project's cash flows.

Question

Quizplus · Accepted Answer

The incremental cash flow principle suggests that a firm should consider only the costs and revenues that are directly attributable to the project in question. Since fixed costs represent obligations that the firm has regardless of whether the project is undertaken or not, they should be excluded. On the other hand, variable costs are directly related to the project and thus should be included. Sunk costs, which are costs that have already been incurred and cannot be recovered, should also be excluded. Opportunity costs, which represent the benefits foregone by not pursuing an alternative course of action, should be included in the analysis. Therefore, the best choice is C, which includes variable costs and excludes fixed costs.

According to the Incremental Cash Flow Principle, a Firm Should