What Is Incremental Cash Flow?

Incremental cash flow is the amount of change in the overall future cash flow of the enterprise directly caused by the decision to invest in a certain project. If cash flows exist regardless of whether the investment project is accepted or not, it is not relevant to investment decisions. ^[1]

Incremental cash flow

Right!

Incremental cash flow is the amount of change in the overall future cash flow of the enterprise directly caused by the decision to invest in a certain project. If cash flows exist regardless of whether the investment project is accepted or not, it is not relevant to investment decisions. ^[1]

We use a general definition:

The incremental cash flow in the project evaluation includes all changes in the company's future cash flow that are directly caused by the acceptance of the project.

This definition of incremental cash flow implies an obvious corollary: any cash flow is irrelevant if it exists regardless of whether the project accepts it or not.

Incremental cash flow = all cash flow generated after accepting the project-all cash flow without this project

Incremental project cash flows = firm cash flows with the project-firm cash flows without the project.

As inferred, when assessing incremental cash flows, sunk costs are not counted as incremental cash flows. Because sunk costs have incurred costs regardless of whether the company accepts the project or not, and have no change in cash flow.