Incremental Cash Flow

ABSTRACT

A manufacturing company expects to sell $950,000 in the first year of a new product that was just launch into the market and are expected to sell $1,500,000 each year for the next eight years. A direct cost which includes labor and materials will cost them 45% of sales. Indirect costs are estimated at $95,000 each year. A new manufacturing building will cost them $1,500,000, which will be depreciated over the first five years. There will be an additional net investment in inventory and receivables in the amount of $200,000. The tax rate that is used is 35% and the cost of capital is 10%. A prepared incremental cash flow for the new project is done in this article and a payback period and net present value will be calculated.

INCREMENTAL CASH FLOW

Incremental cash flow statement is additional revenue that is generated when a business launches a new product or project (Lambing & Kuehl, 2007). The cash flow is considered to be outside the standard and usual sources of cash that the organization enjoys, and remains in that class or status until the project is finished. One benefits of the cash flow is that it makes the task of measuring the progress, or lack of it, associated with the new product or project. This will determine if the product or project is worth continuing.

Incremental Cash Flow Statement

Cash Flow Forecast - Yearly

Years revenues indirect costs direct costs profit depreciation EBIT Tax EAT Cash Flows

0 950000 95000 42750 812250 300000 622250 21778.75 600471.25 900471.25

1 1500000 95000 67500 1337500 300000 -1662500 -58187.5 -1604312.5 -1304312.5

2 1500000 95000 67500 1337500 300000 -1662500 -58187.5 -1604312.5 -1304312.5

3 1500000 95000 67500 1337500 300000 -1662500 -58187.5 -1604312.5 -1304312.5

4 1500000 95000 67500 1337500 300000 -1662500 -58187.5 -1604312.5 -1304312.5

5 1500000 95000 67500 1337500 1337500 46812.5 1290687.5 1290687.5

6 1500000 95000 67500 1337500 1337500 46812.5 1290687.5 1290687.5

7 1500000 95000 67500 1337500 1337500 46812.5 1290687.5 1290687.5

8 1500000 95000 67500 1337500 1337500 46812.5 1290687.5 1290687.5

This is how I calculated this.

Direct Cost is calculated by taking revenues and multiplying by 45%.

Profit is calculated by taking revenue and subtracting