Incremental Cash Flow

Incremental cash flow is the additional operating cash flow that an organization receives from taking on a new project and any other operating activities that generates cash flows. A positive incremental cash flow means that the company's cash flow will increase with the acceptance of the project known as operating activities.

 

In determining how the company should or should not accept the new project, there are several things that must be identified when determining the incremental cash flows, such as the initial outlay, cash flows from taking on the project, terminal cost (or value) and the scale and timing of the project. A positive incremental cash flow is a good indication that an organization should spend some time and money investing in the project.

Not only in accepting a new project, but also determining incremental cash flow is necessary for investors. A good investment come from how much you spend for a new instrument and the opportunity for that instrument to be grow. The grow of investment may vary, but to simplify it, let’s just see it as capital gain, and cash flow generated from that instrument. Remember about cash is the king? Cash is something that we can use to finance in business. In this term, cash is resource to expanding business, investment, etc. With the resource of cash, we can expand it to a bigger one with help of incremental cash flow principle. We can generate cash flow and expand our business depending how wise we use our resources to create bigger cash flow.

In the world of business valuation, knowing how much incremental cash flow generated can be really useful in determining value of discounted cash flow with 2 models known as free cash flow to firm model and free cash flow to equity model. The result of this process is the value of company.