Question

Which one of the following is an example of an incremental cash flow for Project A?

a) The property taxes on a currently owned warehouse that has been sitting idle but is going to be utilized by Project A
b) The insurance on a building the company currently owns that will house the operations for Project A
c) The rental cost of some new machinery that will be acquired for Project A
d) The cost of the test marketing to ascertain whether or not Project A is feasible
e) The contractual annual salary of the company president

Answer 1

Answer:

c) The rental cost of some new machinery that will be acquired for Project A

Explanation:

Incremental cash flow for a project relate to those activities undertaken specifically for the project which involve a fixed outlay of cash flows.

It means possible increase or decrease in cash flows when a new project is taken up. Such cash flows are entirely attributable to the project under consideration.

In the given case, property taxes, insurance were pre existing costs i.e which would've been incurred anyway.

Similarly, test marketing cost to know of project viability is not a recurring but one time cost and most importantly it is incurred prior to taking up the project.

Contractual annual salary of the president is not attributable to Project A alone.

Hence, the rental cost of some new machinery that will be specifically acquired for Project A would be termed as incremental cash flow for Project A.

Answer 2

Incremental cash-flow that is added operating cash flow that an organization gets from taking on a new project. A positive cash flow means that the company is accepting the project.

• The cash flow for a project should include all the incremental costs and the opportunity costs.

• The rental costs of a machinery will be acquired for the project is a sign of incremental cash flow.

Hence the option  C is correct.

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