Incremental or Differential Cash Flow Report

Cost benefit analysis involves comparing the financial results of the different alternatives as well as carrying out “what if” analysis.

The “Incremental or Differential Cash Flow Report” allows you to add and subtract projects to generate the incremental cash flow or to combine projects.

The following example is for a manufacturing firm exploring a plant expansion to increase sales. The two options are:

1. Invest $8.2M to increase the production and sales of products A & B
2. Invest $12.26M to increase the production and sales of products A & B plus add a new product “Z”

Using the Incremental Cash Flow Report, the cash flow for the $8.2M expansion option is subtracted from the $12.26M expansion cash flow to generate the incremental cash flow.

The return (IRR) on the additional investment of $4,060,000 for the $12.26M expansion is 3.42%. Clearly the $8.2M expansion is the best option from a financial perspective.