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Incremental Cash Flow

The second aspect of the data required for capital budgeting relates to the basis on which the relevant cash outflows and inflows associated with proposed capital expenditure are to be estimated. The widely prevalent practice is to adopt incremental analysis. According to incremental analysis, only differences due to the decision need be considered. Other factors may be important but not to the decision at hand.For purposes of estimating cash flows in the analysis of investments, Incremental cash flows; that is, those cash flows (and only those. cash flows) which are directly attributable to the investment are taken into account. It is for this reason that fixed overhead costs which remain the same whether the proposal is accepted or rejected are not considered. However if there is an increase in them due to the new proposal they must be considered.

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