What is typically excluded from the incremental cash flow analysis?

The correct answer is sunk costs, as they are typically excluded from incremental cash flow analysis because they refer to costs that have already been incurred and cannot be recovered. In decision-making for current or future projects, sunk costs should not influence the evaluation since they do not change regardless of whether the project moves forward or not. Focus is instead placed on future cash flows that will be affected by the decision at hand.

The analysis prioritizes cash flows that will occur as a direct result of the project, such as additional revenues or any potential side effects it may have on other operations. Opportunity costs, which represent the benefits foregone by choosing one option over another, are likewise crucial for understanding the potential return compared to alternative investments. Since only new costs and revenues generated by a project are relevant for assessing its financial viability, excluding sunk costs ensures the analysis is focused on future profitability and decision-making validity.