Question

Identify incremental cash flows that need to be considered in capital budgeting

Answer 1

The incremental cash flow is the extra cash flow required generated by the company with the acceptance of new project. It is the net cash flow from the inflows and outflows within the defined period of time.

In capital budgeting, the incremental future cash flows are considered for the project. The incremental cash flows are identified and discussed below:

1. Incremental expenses.
2. Ignore sunk costs.
3. Incremental overhead costs.
4. Ignore interest payments.
5. After tax free cash flows which includes initial outlay, terminal cash flow and differential flows over the project life.