What are incremental cash flows in a DCF analysis?

Incremental cash flows represent the additional cash flows that a project generates beyond what would occur without the project being undertaken. This concept is central to a DCF analysis as it helps assess the viability and value of a specific investment or project.

When evaluating a potential investment, it is crucial to focus on cash flows that are directly attributable to that decision. This means identifying revenue streams, costs, and any other financial impacts that would not materialize but for this particular project. The emphasis on "additional" is key; incremental cash flows highlight the new financial benefits that arise as a result of the investment, allowing investors to gauge the potential for returns.

In contrast, cash flows generated from existing operations do not pertain to the new project and, thus, do not contribute to understanding the project's incremental value. Projected cash flows adjusted for inflation describe a method of inflation accounting but do not directly link to the unique cash flows generated by the project. Overall revenue minus total expenses is a general accounting equation and does not specifically define incremental cash flows; it could apply to a variety of financial situations rather than focusing solely on the new project in question.