Relevant cash flows

In this lesson

1. 0:00 Introduction to quantitative analysis and NPV
2. 1:37 Three properties of relevant cash flows
3. 2:27 Why cash flows matter more than profits
4. 3:42 Common non-relevant cash flows explained
5. 5:50 Worked example: Wolford vehicle sale
6. 8:46 Worked example: Advent Limited takeover

About this lesson

You'll discover the three essential properties that make a cash flow relevant: it must occur in the future, be incremental to the decision, and be an actual cash flow rather than an accounting entry. Through practical examples, you'll master how to exclude sunk costs, allocated overheads, depreciation, and financing costs, ensuring your financial analysis focuses only on what truly matters for decision-making. This video is essential for CIMA and ACCA students tackling quantitative analysis in papers like FM, AFM, and SBL. The concept of relevant cash flows underpins every investment appraisal you'll encounter, from capital budgeting to acquisition decisions. By learning to distinguish between relevant and irrelevant costs—such as recognising that the original purchase price of an asset is a sunk cost and therefore irrelevant—you'll avoid common errors that cost marks in exams and lead to poor business decisions in practice. The lesson walks you through two worked examples: first, a vehicle sale decision where you'll see why historical acquisition costs don't matter, and second, a corporate takeover where multiple cost categories must be evaluated. You'll learn why we focus on cash flows rather than accounting profits, how opportunity costs fit into the framework, and why financing costs are already captured in your discount rate. This foundation ensures your investment appraisals are objective, defensible, and aligned with what investors actually care about: cash returns.

Duration: 13m