Cash flow acquired by a company when it takes on a new project Show
What is Incremental Cash Flow?Incremental cash flow refers to cash flow that is acquired by a company when it takes on a new project. To estimate an incremental cash flow, businesses must compare projected cash flow if it takes on a new project to when it doesn’t, putting into consideration how accepting such project may affect the cash flow of another part of the business. In the event that a reduction in the cash flow of another aspect or product is the result of taking on a new project, then it is called cannibalization. Incremental cash flow is important in capital budgeting because it helps predict cash flow in the future and determine a project’s profitability. Difficulties in Determining Incremental Cash FlowIncremental cash flows are helpful, especially in determining if a company should take on a new project or not. However, accountants also encounter certain difficulties when estimating incremental cash flow. Here are some of the challenges: 1. Sunk costsSunk costs are also known as past costs that have already been incurred. Incremental cash flow looks into future costs; accountants need to make sure that sunk costs are not included in the computation. This is especially true if the sunk cost happened before any investment decision was made. 2. Opportunity costsFrom the term itself, opportunity costs refer to a business’ missed chance for revenues from its assets. They are often forgotten by accountants, as they do not include opportunity costs in the computation of incremental cash flow. One example is a company that specializes in sound system installations that skips a project that requires the use of five sets of boom boxes. Currently, the business is only putting the five extra sets of boom boxes in its storage facility, instead of taking on the project that will earn $5,000. This illustrates the opportunity cost of $5,000. 3. CannibalizationAs mentioned above, cannibalization is the result of taking on a new project that reduces the cash flow of another product or line of business. For example, an owner with an existing mall that caters to classes A and B, and everything it sells is sold at a premium because it caters to luxury shoppers. In another part of the same city, it decides to open a new mall that caters to classes B, C, and D, selling the same items as the other mall but at a significantly lower price. This will result in cannibalization because some people will no longer go to the first mall because they can get most things at the new mall for a much lower price. 4. Allocated costsThese are some costs that must be allocated to a specific department or project and there may not be a rational way to do it (i.e. rent expense).. Incremental Cash Flow vs. Total Cash FlowIncremental cash flow and total cash flow both deal with a business’ or project’s cash flow. However, they are notably different from each other.
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Which one of the following costs was incurred in the past and Cannot be recouped?The sunk cost is that cost which has already been incurred and can not be recovered. Sunk cost is considered irrelevant in future decision making as this has already been incurred.
Which one of the following types of costs was incurred in the past and Cannot be recouped multiple choice incremental side sunk opportunity?The correct choice is sunk cost. An incremental cost is an excess cost that is incurred because of manufacturing a product's additional units. A "side cost" is a cost that has no bearing on business operations and can be ignored. A sunk cost is a cost that has been incurred previously and cannot be recouped.
Which one of the following costs was incurred in the past and Cannot be recouped select one incremental side sunk opportunity erosion?A sunk cost refers to money that has already been spent and cannot be recovered.
Which one of the following terms refers to the next best option that is foregone once an asset is utilized in a specific project group of answer choices?Opportunity cost is the value of the best opportunity forgone in a particular choice. It is not simply the amount spent on that choice.
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