Define Net Incremental Cash Flows In Cost Accounting?
Answers
Incremental cash flow refers to cash flow that is acquired by a company when it takes on a new project. To estimate an incremental cash flow, businesses must compare its cash flow if it takes on a new project and if it
doesn’t, putting into consideration how accepting such project can affect the cash flow of another part of the business.
In the event that a reduction in the cash flow of another aspect or product is the result of taking on a new project, then, it is called cannibalization. Incremental cash flow is important in capital budgeting because it helps predict cash flow in the future and determine a project’s profitability.
Incremental cash flows are helpful, especially in determining if a company should take on a new project or not.
However, accountants also encounter certain difficulties when computing for incremental cash flow. Here are some of the difficulties:
1. Sunk costs
2. Opportunity costs
3. Cannibalization
4. Allocated costs
Incremental cash flow and total cash flow both deal with a business’ cash flow. However, they are still different from each other.
- Incremental cash flow
- Total cash flow
For example, the CEO wants to see the total cash flow of the company from each of the preceding five years. To come up with the correct figure, all the cash flows from each year in the last five years are put together.