INCREMENTAL CASHFLOWS

 

INCREMENTAL CASHFLOWS

he two incremental cash flows are:

• Introduction of a new good or service will lead to a rise in sales, that in turn will increase income.
• The expansion of the product line can cause productivity gains and lead in cost reductions, that in turn will cause to increase retained earnings.

Payback period: the duration of time needed for an asset to regain its original income or savings expenditure. For example, if the project costs $10,000 and saves $2,500 annually, the payback time is four years. Net Present Value: Net Current Value (NPV) is the gap amongst both the current value of direct money investment and the current price of cash outflows for a length of time (Hu, 2019). NPV is used to evaluate the feasibility of the acquisition. NPV is used to assess the decision to invest and to provide a straightforward way for the leadership of the business to determine if the investment would add value to the company. .

Usually, if a transaction has a favourable net present worth, it will bring value to the business and support the shareholders of the company. Internal Return Rate (IRR): The domestic percentage of return is a proportion of interest that allows the current value (NPV) of all retained earnings from a specific project equal to zero (Chen, 2019). The higher the internal rate of return of both the project, the more attractive it is to pursue. Profitability Index: In essence, the productivity index is a variation of the market valuation system. Whereas the current value is an objective measure (i.e. it is given as a maximum dollar amount for a project), the profitability index is a subjective measure (i.e. it is displayed as a ratio). If IRR < Discount rate, then the scheme is not productive.

 

 

 

References

Chen, C. W., Melessa, S., Mergenthaler, R., & Ohn, H. (2019). Surrogate Measures of Cash Flows: Problems and Solutions. Available at SSRN 3075461.

Hu, J., & Kim, J. B. (2019). The relative usefulness of cash flows versus accrual earnings for CEO turnover decisions across countries: The role of investor protection. Journal of International Accounting, Auditing and Taxation, 34, 91-107.

Stewart, D. W. (2019). Estimating Cash Flows. In Financial Dimensions of Marketing Decisions (pp. 49-71). Palgrave Macmillan, Cham.