capital-allocation

# Capital allocation Choosing among investments is choosing what not to do. This is the appraisal of individual proposals; which businesses and bets the company should be in belongs to `corporate-strategy:portfolio-strategy`. ## Appraise on incremental cash Only cash flows that change because of the decision belong in the analysis: - **Sunk costs are irrelevant.** Money already spent is not a reason to continue, though it is reliably presented as one. - **Allocated overhead is usually irrelevant.** If the cost occurs anyway, it does not belong in the incremental case. - **Opportunity cost is relevant**, including the capacity consumed that then cannot serve anything else. - **Working capital is a real outflow.** Growth that consumes cash is not free because it is growth. Discount for time and risk. A hurdle rate should reflect the risk of the specific proposal — applying one company-wide rate systematically overfunds risky projects and starves safe ones. ## Read payback for what it tells you Payback ignores everything after the threshold and so is a poor ranking tool. It is a good *liquidity and uncertainty* measure: how long capital is at risk, and how far into an uncertain future the case depends on. Use net present value to decide, payback to understand exposure. A proposal with strong NPV whose returns all arrive in years four and five is a forecasting question as much as an investment one. ## Interrogate the case, not the sponsor Every proposal arrives ad...