What are incremental cash flows during a project's life primarily composed of?

Incremental cash flows during a project's life are primarily composed of revenue minus related costs and depreciation because these cash flows reflect the additional cash that a project generates, which is crucial for assessing its viability. When evaluating a project, it is essential to focus on the net cash flows directly attributable to the decision to undertake it.

This means that the incremental cash flows are the additional revenue produced by the project minus the costs that are incurred as a direct result of the project, including variable costs that fluctuate with production, fixed costs that are associated with the project, and any depreciation that reflects the wear and tear on capital assets utilized in the project. By considering these components, one can get an accurate view of how much cash the project is expected to generate beyond what would have occurred without the project.

In contrast, options like only fixed and variable costs or annual profits do not account for the revenue generated, nor do they capture the cash flow aspect critical for project evaluation. The last option, which includes all financial expenditures made during the project, would not provide a clear picture of the cash flows specific to the project's operations, as it could include sunk costs or financing costs not directly tied to operational performance.