what is incremental cash flow 
incremental cash flow is the additional operating cash flow that an organization receives from taking on a new project a positive incremental cash flow means that the company s cash flow will increase with the acceptance of the project a positive incremental cash flow is a good indication that an organization should invest in a project investopedia jessica olahunderstanding incremental cash flowthere are several components that must be identified when looking at incremental cash flows the initial outlay cash flows from taking on the project terminal cost or value and the scale and timing of the project incremental cash flow is the net cash flow from all cash inflows and outflows over a specific time and between two or more business choices for example a business may project the net effects on the cash flow statement of investing in a new business line or expanding an existing business line the project with the highest incremental cash flow may be chosen as the better investment option incremental cash flow projections are required for calculating a project s net present value npv internal rate of return irr and payback period projecting incremental cash flows may also be helpful in the decision of whether to invest in certain assets that will appear on the balance sheet example of incremental cash flowas a simple example assume that a business is looking to develop a new product line and has two alternatives line a and line b over the next year line a is projected to have revenues of 200 000 and expenses of 50 000 line b is expected to have revenues of 325 000 and expenses of 190 000 line a would require an initial cash outlay of 35 000 and line b would require an initial cash outlay of 25 000 to calculate each project s net incremental cash flow for the first year an analyst would use the following formula icf revenues expenses initial cost where begin aligned text icf text revenues text expenses text initial cost textbf where text icf text incremental cash flow end aligned icf revenues expenses initial costwhere in this example the incremental cash flows for each project would be la icf 2 0 0 0 0 0 5 0 0 0 0 3 5 0 0 0 1 1 5 0 0 0 lb icf 3 2 5 0 0 0 1 9 0 0 0 0 2 5 0 0 0 1 1 0 0 0 0 where la line a incremental cash flow begin aligned text la icf 200 000 50 000 35 000 115 000 text lb icf 325 000 190 000 25 000 110 000 textbf where text la text line a incremental cash flow text lb text line b incremental cash flow end aligned la icf 200 000 50 000 35 000 115 000lb icf 325 000 190 000 25 000 110 000where la line a incremental cash flow even though line b generates more revenue than line a its resulting incremental cash flow is 5 000 less than line a s due to its larger expenses and initial investment if only using incremental cash flows as the determinant for choosing a project line a is the better option limitations of incremental cash flowthe simple example above explains the idea but in practice incremental cash flows are extremely difficult to project besides the potential variables within a business that could affect incremental cash flows many external variables are difficult or impossible to project market conditions regulatory policies and legal policies may impact incremental cash flow in unpredictable and unexpected ways another challenge is distinguishing between cash flows from the project and cash flows from other business operations without proper distinction project selection can be made based on inaccurate or flawed data 