1. Introduction

The previous section has shown how to compute the Net Cash Flows of simple projects with few interdependencies with other projects or activities within the firm. 

 

In reality, projects are often not "green field" and they have significant interdependencies with other projects or actvities. The purpose of this section is to show how to estimate the relevant cash flows in such situations. 

  

As it turns out, it is not always easy to correctly identify the incremental net cash flows of such projects. For example, suppose Ford decides to launch a new model of its F-150 series. As a result, sales of the current version will most likely plummet. What are the incremental revenues and costs in such a situation? Or consider a real estate developer who decides to build a residential complex on a plot of land. In doing so, the developer foregoes alternative uses of the land such as the construction of a commercial complex, a hotel, or a golf course. How to incorporate such foregone opportunities?

  

What we are looking for are the so-called incremental net cash flows (also known as marginal net cash flows). These are the additional cash flows that are caused by the investment decision in question (e.g., launch, expand, or abort the project).

 

The complexities in the estimation of the incremental net cash flows can generally be traced back to the following challenges, which are the subjects of the next few sections: