Incremental Cash Flow Analysis

Sometimes the management may decide to incur certain changes within the business operations that may result in a change in the cash flow of the entire business. This change may result in an increment in the cash flow of the business. The result of change in the cash flow may have positive or negative impact on the business so it is necessary to analyze this change before implementing it practically. An example of incremental cash flow analysis can be termed as the decision of the management to change a manufacturing unit and replace the unit with the new one. Before implementing this change the management must find out what will the effect of changing the manufacturing unit on the cash flow of the business and what will the effect of after changing the manufacturing unit when new unit will start working.

An example of the incremental cash flow analysis can be considered when a manufacturing unit is being replaced with a new one where the new one can produce 3,000 units per hour and the old one has a capacity of producing 2,000 units per hour. The installment if new unit will increase the capacity of business to produce 1000 units more per hour. The cost associated with the installation of new unit is $200,000 and the profit that will be yielded by each unit produced is $0.10.  Total working hours of the machine are 40 hours per week. The incremental cash flow yielded with this installation can be calculated as follows:

Increase of 1000 units per hour x 0.10 profit on each unit = $ 100 incremental cash flow per hour

=$ 100 X 40 hours per week x 52 weeks per year

=$ 208, 000


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