The mechanism of the palladium-catalysed [3+2] intramolecular cycloaddition of alkylidenecyclopropanes to alkynes has been computationally explored at DFT level. The energies of the reaction intermediates and transition states for different possible pathways have been calculated in a model system that involves the use of PH3 as a ligand. The results obtained suggest that the most favourable reaction pathway involves the initial C--C oxidative addition of the cyclopropane to a Pd0 complex to give an alkylidenepalladacyclobutane, which isomerises to a methylenepalladacyclobutane intermediate. Subsequent cyclisation by alkyne carbometallation, followed by reductive elimination affords the final product. An alternative mechanism consisting of a palladaene-type rearrangement is less probable in terms of Gibbs energy, but cannot be fully discarded because it is competitive if one considers electronic energies. For substrates that present an ester group at the terminal position of the triple bond we have found an alternative, more favourable mechanistic route that explains why the [3+2] cycloaddition of these types of systems does not lead to the expected cycloadducts.