Incremental Cash Flow

It relates to cash flow forecasting and liquidity estimation for a new project. Positive incremental cash flow (ICF) related to a new project shows the project is worth investing in, and if the value is negative, then the project may not be that beneficial.

ICF = Revenues – Expenses – Initial Cost

If a firm designs two new products and is looking to compare, it will evaluate the revenues generated and the initial cash outlay.

If the overall expenditure is higher for one of the products, while the ICF is the same for both, the one with lower expenses will be preferred.

The method's main advantages are that it helps businesses decide whether to invest in some assets or get the data for commodity swap valuation in conditions if they plan to expand on their existing product line or increase in a new product based on it.

The method's limitations are that multiple variables are used to evaluate a project, which cannot be analyzed initially.

Further, the regulatory aspects and market conditions may change with time, and the project may suffer losses due to unforeseen factors.     

One such example is the acquisition of Corus Group by the Tata steel group.

Tata invested as it provided a way to tap and infiltrate the European Markets, and the ICF calculations showed benefits from the acquisition. Still, internal and external factors resulted in a slump in steel demand, forcing the firm to shut down the plant in Europe. Later, they planned to sell some of the acquired units. 

With every new business, the expense increases with time and can strain a company's budget. So such decisions should be monitored carefully to estimate income and financial performance accurately.