Cash Flows in Capital Budgeting Rules: Included:          Incremental revenues Incremental costs Initial working capital and any subsequent change in net working capital Opportunity costs Associated costs (revenue enhancements, product cannibalisation) Tax Initial outlay on equipment plus any installation costs Project fixed costs Project overhead costs Excluded:       Interest charges (only concerned with investment flows, not financing flows) Feasibility, marketing studies if started before the start of t he project General fixed costs General overhead costs Depreciation (but use in tax calculation to get tax cash flow) Sunk costs (but these may give rise to opportunity costs) Capital budgeting questions would usually involve a project where the company evaluates whether to go ahead or reject a proposed project. Project capital budgeting analyais can be applied to a vast range of situations. Companies will use capital budgeting to evaluate general expenditure; refurbishing the retail estate, a redundancy program, a major acquisition, an overseas expansion, choosing a new fleet of vans, etc. The sums involved can be quite modest through to billions of dollars or pounds in the case of acquisitions. There are probably five stages in the capital budgeting exercise; 1. Determine the initial outlay. Involved here would be; the capital expenditure on the new equipment, the installation costs, capitalised installation costs would be added to the cost of the equipment and depreciated, expensed installation costs would be taken down to the tax calculation straight away. Initial working capital, made up of accounts payable (a cash inflow because you are not spending the money), accounts receivable (a cash outflow because you don’t have the money yet), and inventory (a cash outflow because it is a use of funds). Initial working capital will usually be shown net, and is usually a cash outflow at the start of the project. Any sale of old machin

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