Introduction to Finance

incremental cash fl ows 
represent 
the diff erence between the fi rm’s 
after-tax cash fl ows with the project 
and the fi rm’s after-tax cash fl ows 
without the project
base case 
fi rm’s after-tax cash 
fl ows without the project
cannibalization 
this occurs when 
a project robs cash fl ow from the 
fi rm’s existing lines of business
enhancement 
increase in the cash 
fl ows of the fi rm’s other products 
that occur because of a new project
opportunity cost 
cost of passing 
up the next best alternative
16
Nikhil Deogun, “Pepsi Takes Aim at Coke With New One-Calorie Drink,” 
The Wall Street Journal
, (October 5, 
1998), p. B4. 
17
David P. Hamilton, “Circuit Break: Gambling It Can Move Beyond PC, Intel Off ers a New Microprocessor,” 
The 
Wall Street Journal
, (May 29, 2001), pp. A1, A8. 
18
Shira Ovide, “Next CEO’s Job: Fix Microsoft Culture,” 
The Wall Street Journal
, (August 26, 2013), page B1, 
accessed February 24, 2016, at http://www.wsj.com/articles/SB10001424127887324906304579035141246779898.

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C H A PT E R 1 7 Capital Budgeting Analysis
If a fi rm is thinking about placing a new manufacturing plant in a building it owns, the 
fi rm cannot assume the building is free and assign it to the project at zero cost. The project’s 
cash fl ow estimates should include the market value of the building as a cost of investing since 
this represents cash fl ows the fi rm cannot receive from selling the building.
Irrelevant Cash Flows 
Now that we’ve examined some factors that infl uence cash 
fl ow estimates and should be included, let’s look at some factors that should be excluded from 
the calculation.