Incremental cash flow

Incremental cash flow is the net change in a firm's cash that occurs solely because a project proceeds — the with-project minus the without-project cash position. Sunk costs and unaffected overheads are excluded from investment appraisal.

ByHoang TruongUpdated July 3, 2026

FrameworkDCF investment appraisal

See it move

Loading infographic...

Without a new project, the firm's existing product keeps generating €380,000. With the project, that existing line slips to €350,000 because of cannibalisation, but the new project itself contributes €150,000, for a total of €500,000. The incremental cash flow is the difference, €120,000 — cannibalisation is included, while sunk costs and unaffected overhead are left out.

Where it fits

TopicCapital Budgeting & Investment AppraisalCoreSubjectCorporate FinanceCore

The formula

LaTeX

\Delta CF_t = CF_t^{\text{with}} - CF_t^{\text{without}}

Variables

$Δ C F_{t}$: incremental cash flow in period t
$C F_{t}^{w} i t h$: total firm cash flow in period t if the project proceeds
$C F_{t}^{w} i t h o u t$: total firm cash flow in period t if the project does not proceed

Sunk costs produce a zero incremental effect and must be excluded. Cannibalisation of existing product revenues is a negative incremental flow that must be included.

Check yourself

PracticeCORE

A firm spent €40,000 on market research last year and is now deciding whether to launch a new product. The launch will generate €18,000 annual contribution margin but will reduce an existing product's contribution by €4,000 per year. Which cash flows belong in the NPV calculation?

Select an answer to check your understanding.