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There were also a few items that did not represent cash flows. These items include the depreciation on the 12 million investment and the 50,000 in rent that head office attributed to the project. The rent charged is not a cash flow for the project, since the opportunity cost of not renting that space has already been included in the calculation. That rent, however, affects the after-tax cash flow because it increases expenses, lowering the projects tax burden. Depreciation expense will also lower the projects tax burden

Not included in the calculation was the variable cost of 1.80 per unit. This is the portion of head office costs that has been attributed to the project. This is not counted as a project cash flow, because these costs are not project-specific. They would be paid by the company regardless of whether or not the project proceeded. This also means that they do not represent a project-specific tax benefit, either. The capital budgeting process should ideally incorporate cash flows that are attributable to the project itself......

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