NPV = PV of inflows – PV of outflows

(cost of capital = discount rate)

(cost of capital acts as the hurdle rate that a project must clear for acceptance)

 The constrained resource is the limited funds available for investment, and the profitability index
is similar to the contribution margin per unit of the constrained resource. 

“Investment required” → cash outflows at the beginning of the project - salvage value - working capital
needed

Annual incremental costs = Increase in revenues - annual incremental cash operating expenses -
depreciation charges that result from making the investment
Annual incremental costs = Cost savings - annual incremental cash operating expenses - depreciation
charges that result from making the investment
Initial investment - salvage value realized from sale of old equipment
Depreciation = total cost of machine / years (lifetime)