At some point, many companies are frequently required to make particular funding decisions related to specific projects for profit and further successful development. However, it is essential to analyze the expediency of investments and the possibility of the cash flow’s increase. Thus, planning to be involved in any new project, a company should address incremental cash flow that may be defined as the cash flow acquired by it in the case of the project’s undertaking (Best, 2021). In order to evaluate incremental cash flow, a company should compare expected cash flows if it invests in a project and if it does not. The impact of the project’s acceptance on other business parts’ cash flow should be taken into consideration as well.
At the same time, there are several concepts essential for the understanding and estimation of incremental cash flow that should be considered during its analysis. These concepts include sunk costs, opportunity costs, allocated costs, and cannibalization. Sunk costs are already incurred costs that should not be included. In turn, opportunity costs refer to missed revenue chances from a business’ assets. Allocated costs refer to specific projects or departments, and their inclusion in the computation is optional. Finally, cannibalization addresses the situation when a new project reduces any previously taken project’s cash flows.
It goes without saying that there are multiple factors that should be considered as well in the analysis of incremental cash flow. They are changes in regulations, market trends, the company’s adjustment to legal policies, and cash flow modifications on the basis of business operations. In addition, several components should be identified for incremental cash flow evaluation, including the project’s timing and scale, the initial outlay, and terminal value or cost. Moreover, a company should identify its business revenue, list the project’s initial costs, record business expenses, and compare the differences.
Reference
Best. (2021). Incremental cash flow: Meaning, calculations, importance, and limitations. Business Yield. Web.