4 responses Sep 10

Preethi work:

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The incremental cash flows

When implementing a new project, there is need for the organization to come up with budgeting models that will ensure the organization meets its goals at the end of the day. One of such approaches is the use of incremental cash flow whch is basically a financing model whereby the cash flow is realized  immediately anew project has been accepted by the top management  for implementation. This emanates from increase of the cash flow which emanates from key business operations that will trigger the acceptance of the new capital investment in the project (Habib, 2011).  It is important therefore  for the finance managers to when launching new products or implementing anew project to  come up with capital budgeting decisions that will ensure the business gets it value at the end of the day.

In this case, the incremental cash flow needs to adopt a holistic approach which will need to capture  the following key factors .One is  the initial investment outlay which is basically the amount that is required in starting of anew project product. The second component is the operating cash flow which is the overall amount of cash that will be generated by the new project less than the operating cash flows and the raw material expenses (Sayari & Mugan, 2013). The last component is the terminal cash flow that is the net cash flow which is captured at the end of the project and this occurs after selling of the assets of that particular project. Therefore, the following are two incremental cash flows models namely, net present value and the internal rate of return.

Internal rate of return

The internal rate of return concept entails the process where the capital budgeting decision whereby if the internal rate of return is greater than the minimum return there is need to implement the project as it is profitable(Pae & Yoon,2012). On the other hand, if the project is low, the project will trigger losses and it is not recommended for one to implement it.

Meanwhile, the net present value is basically the difference between the present values of cash inflows and the outflows over a very long period of time (Pae & Yoon, 2012). This is applied in capital budgeting and the investment in analyzing the profitability of the project in the investment. If the project ahs net value, it is recommended that it will yield positive results and the converse is true.

References

Habib, A. (2011). Growth opportunities, earnings permanence and the valuation of free cash flow. Australasian Accounting, Business and Finance Journal, 5(4), 101-122.

Pae, J., & Yoon, S. S. (2012). Determinants of analysts’ cash flow forecast accuracy. Journal of Accounting, Auditing & Finance, 27(1), 123-144.

Sayari, N., & Mugan, F. N. C. S. (2013). Cash flow statement as an evidence for financial distress. Universal Journal of Accounting and Finance, 1(3), 95-103.

Venkata work:

Incremental Cash flow

 

Incremental cash flow is generally referred to as cash flow that is acquired by a company when it starts a new project. Generally, the capital budgeting decisions are made by comparing initial project investment outlay to the project’s future incremental cash flows and its terminal cash flow. To estimate incremental cash flow, businesses must compare the projected cash flow when it takes on a new project and if it doesn’t, putting into consideration how accepting such project may affect the cash flow of another part of the business (Incremental Cash Flow, n.d). this phenomenon is also called as “cannibalization”.

Accountants often forget another cost in computing incremental cash flow, which is the opportunity cost, which refers to a business’s missed chances for revenues from its assets (Tuovila, 2019). Positive incremental cash flow is a good sign that the investment is more profitable to the company than the expenses it will incur. Incremental cash flow can be an excellent tool to assess whether to invest in a new project or asset, but it should not be the only resource for determining the new venture. In the way of allocating costs to each corporation administration, accountants will always give costs to capital budget projects. Some of those costs may be applicable for managing cash flows, but others aren't. Since financial analysts are concerned with incremental cash flows, they should include any unique indirect additional costs that the project creates in their calculations. However, if the company would have incurred costs regardless of the project, they should not be included in cash flow calculations (Garcia, 2020). For example, costs of office space shared buildings, and executive salaries are probably not affected by the project and should not be included in these calculations.

Cash flow analysis is also involved with analyzing future costs, and it will not be involved with the past ones. Analysts must be careful to exclude sunk costs from any cash flow estimations. Even if the sunk costs appear relevant to the project, they shouldn't be included if they occurred before the investment decision (Garcia, 2020). For instance, a company may have paid for all the marketing tests a while back to discover the viability of new products they want to invest in. Even though it might seem relevant to the actual product investment, sunk costs shouldn't be incorporated in the initial cash outflow decision.

  

References

Incremental Cash Flow. (n.d). Retrieved on  September 10, 2020, from : https://corporatefinanceinstitute.com/resources/knowledge/accounting/incremental-cash-flow/

Garcia. M. (2020). Difficulties in Determining Incremental Cash Flows. Retrieved on September 10, 2020, from: https://smallbusiness.chron.com/difficulties-determining-incremental-cash-flows-81579.html

Tuovila. A. (2019). Incremental Cash Flow. Retreived on September 10, 2020, from : https://www.investopedia.com/terms/i/incrementalcashflow.asp

 

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