What is an incremental cash flow for a project? What concepts do we ne

What is an incremental cash flow for a project? What concepts do we need to examine to help understand how to estimate the incremental cash flow of a project? What else is needed for deciding whether or not to choose a project?

What will be an ideal response?

ANSWER

Answer: The incremental cash flow of a project is the additional money the firm receives from taking on a new project. To estimate the incremental cash flow of a project, we need to examine concepts such as sunk costs, opportunity costs, and erosion costs. We also need to look at the changes in working capital that can occur with a new project. Additionally, we should consider the capital spending necessary to launch the new product and the depreciation process of “expiring” the cost of new production equipment over time. All of these concepts are instrumental in building the incremental cash flow of a project. We can then apply the net present value decision rule in order to make a go/no-go decision for a potential new product.