Answer (C) is correct. Relevant cash flows are a much more reliable guide when judging capital projects, since only they provide a true measure of a project’s potential to affect shareholder value. The relevant cash flows can be divided into three categories: (1) net initial
investment, (2) annual net cash flows, and (3) project termination cash flows. An incremental cash flow is the difference in cash received or disbursed resulting from selecting one option instead of another. It is not a category of relevant cash flows.