Accounting profits only measure the return on the invested capital. Accounting income calculations reflect non-cash items and ignore the time value of money. They are important for some purposes, but for capital budgeting, cash flows are what are relevant.
Economic income is an investment's after-tax cash flow plus the change in the market value. Financing costs are ignored in computing economic income.
Important capital budgeting concepts:
For example, a small bookstore is considering opening a coffee shop within its store, which will generate an annual net cash outflow of $10,000 from selling coffee. That is, the coffee shop will always be losing money. In the previous year, the bookstore spent $5,000 to hire a consultant to perform an analysis. This $5,000 consulting fee is a sunk cost; whether the coffee shop is opened or not, the $5,000 is spent.
Future cash flows represented by negative externalities occur regardless of the project, so they are non-incremental. Such cash flows represent a transfer from existing projects to new projects, and thus should be subtracted from the new projects' cash flows.
Some project interactions:
status | not read | reprioritisations | ||
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last reprioritisation on | suggested re-reading day | |||
started reading on | finished reading on |