Principles of Managerial Finance, 15th Edition

11.3 Finding the Operating Cash Flows

1. LG5

Operating cash flows are the net incremental after-tax cash flows that occur after a firm makes a new investment and begins operating with the new investment in place. Finding the operating cash flows requires identifying all the incremental cash flows related to the firm’s operations that will be affected by the investment decision; this includes any current incremental cash flows that will be forgone and any new incremental cash flows that will be created. In this section, we use the income statement format to clarify what we mean by incremental, after-tax cash flows.

Interpreting the Term Cash Flows

All costs and benefits expected from a proposed project must be measured on a cash flow basis. Cash ...